<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 13, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INNOVATIVE GAMING CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1713864
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
4725 Aircenter Circle
Reno, NV 89502
(775) 823-3000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Edward G. Stevenson
Chairman and Chief Executive Officer
Innovative Gaming Corporation of America
4725 Aircenter Circle
Reno, NV 89502
(775) 823-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
Douglas T. Holod, Esq.
Christopher J. Melsha, Esq.
Maslon Edelman Borman & Brand, LLP
3300 Norwest Center
Minneapolis, Minnesota 55402-4140
(612) 672-8200
Approximate date of the commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement. If the
only securities being registered on this form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[ ] If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE(1) REGISTRATION FEE(1)
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<S> <C> <C> <C>
Common Stock, $.01 par value 1,654,500 $ 2,791,968.75 $ 737.08
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Common Stock, $.01 par value (2) 355,000 $ 599,062.50 $ 158.15
==============================================================================================================
TOTAL 2,009,500 $ 3,391,031.25 $ 895.23
==============================================================================================================
</TABLE>
(1) Fee calculated pursuant to Rule 457(c), based on the average high and low
closing sales price on January 10, 2000.
(2) exercise of certain Warrants.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION; DATED JANUARY 13, 2000
PROSPECTUS
INNOVATIVE GAMING CORPORATION OF AMERICA
2,009,500 SHARES OF
COMMON STOCK
This prospectus relates to a maximum of 2,009,500 shares of common
stock of Innovative Gaming Corporation of America issuable upon the conversion
of Series D 6% Convertible Preferred Stock (the "Series D Preferred Shares"),
certain shares of common stock issuable in lieu of payment of dividends and
exercise of warrants granted to the selling shareholders listed on page 18 of
this prospectus. The total proceeds to us from the exercise of the warrants
issued in connection with the sale of the Series D Preferred Shares (the "Series
D Warrants") and certain other warrants issued to certain selling shareholders
(collectively with the Series D warrants, the "Warrants"), if the Warrants are
exercised in full, would be a maximum of $941,875. We will receive no proceeds
from the sale of the common stock by selling shareholders.
Our common stock is listed on the Nasdaq National Market under the
symbol "IGCA." On January 10, 2000, the last sale price for the Common Stock as
reported on the Nasdaq National Market was $1.75.
THE SHARES OFFERED BY THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DESCRIPTION OF FACTORS WHICH SHOULD
BE CONSIDERED BY INVESTORS BEFORE PURCHASING THE SHARES OFFERED BY THIS
PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. A REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NEITHER THE COLORADO GAMING COMMISSION, THE MISSISSIPPI GAMING
COMMISSION, THE NEVADA GAMING CONTROL BOARD, THE NEVADA GAMING COMMISSION, NOR
ANY OTHER GAMING AUTHORITY HAS PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROSPECTUS OR THE INVESTMENT MERITS OF THE SECURITIES OFFERED HEREBY. A
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE, AND MAY BE
CHANGED. THIS PROSPECTUS IS INCLUDED IN THE REGISTRATION STATEMENT THAT WAS
FILED BY IGCA WITH THE SECURITIES AND EXCHANGE COMMISSION. THE SELLING
SHAREHOLDERS CANNOT SELL THEIR SHARES UNTIL THAT REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THE SHARES OR THE
SOLICITATION OF AN OFFER TO BUY THE SHARES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
The date of this Prospectus is January _____, 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY.................................................................4
RISK FACTORS.......................................................................6
USE OF PROCEEDS...................................................................17
SELLING SHAREHOLDERS..............................................................18
PLAN OF DISTRIBUTION..............................................................19
WHERE YOU CAN FIND MORE INFORMATION...............................................20
NOTE REGARDING FORWARD-LOOKING STATEMENTS.........................................21
LEGAL MATTERS.....................................................................22
EXPERTS...........................................................................22
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES....................................22
</TABLE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus. You must not rely on any information or representations not
contained in this prospectus, if given or made, as having been authorized by us.
This prospectus is not an offer or solicitation in respect to these securities
in any jurisdiction in which such offer or solicitation would be unlawful. The
delivery of this prospectus shall not under any circumstances, create any
implication that there has been no change in our affairs or that the information
contained in this prospectus is correct as of any time subsequent to the date of
this prospectus. However, in the event of a material change, this prospectus
will be amended or supplemented accordingly.
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PROSPECTUS SUMMARY
As used in this prospectus, the terms "Company","we", "us" and "our"
refer to Innovative Gaming Corporation of America and its consolidated
subsidiary.
THE COMPANY
Innovative Gaming Corporation of America ("IGCA") through its
wholly-owned operating subsidiary, Innovative Gaming, Inc. ("IGI", collectively,
the "Company"), develops, manufactures, markets and distributes multi-station
and other specialty gaming machines to regulated gaming markets world-wide. We
have four primary product lines: multi-player/multi-station video table games;
bonus "top box" games that are placed on top of slant top spinning reel slot
machines; single player video slot machines incorporating state of the art
graphics and sound, and unique specialty gaming machines such as "Mythical
Reels(TM)", a game which projects the slot machine's spinning reels out in front
of the box as if spinning in space. We also own the world-wide patent rights to
a unique machine that combines elements of roulette play and pinball in a single
player machine. We believe that our gaming machines will appeal to
casinos/clubs, lotteries and slot route operators seeking to enhance the
entertainment experience by providing new and unique forms of gaming.
We distribute our products directly and through distributors, primarily
on a cash sales basis. In Nevada, we directly place our products under lease,
sales (cash or extended payment terms) or participation agreements where we
retain ownership and share in the net win of the games with the casino.
Our primary target markets have been gaming jurisdictions in North
America, including the states where we are presently licensed: Arizona,
Colorado, Iowa, Louisiana, Mississippi, Minnesota, Nevada, New Mexico, North
Carolina and South Carolina, South Dakota and through distributors in Europe and
Australia. We have submitted and have a pending application in Connecticut and
have submitted games for approval in New Jersey. Previously registered with
Alberta, Manitoba, Saskatchewan, Quebec and the Atlantic Lottery Corporation we
have applications pending in British Columbia and Ontario. The Company has an
agent to market its products in Canada.
Our executive offices are located at 4725 Aircenter, Reno, Nevada 89502
and our telephone number is (775) 823-3000.
RECENT DEVELOPMENTS
On October 12, 1999, we announced that we had entered into a letter of
intent with Equitex, Inc. whereby we would acquire Equitex's subsidiary,
nMortgage.com, Inc. ("nMortgage") in a tax-free exchange of stock (the
"Merger"). Under the terms of the letter of intent, our shareholders will retain
25 percent of the newly-merged company on a post-merger basis. On January 3,
2000, we announced that we had executed a definitive agreement with Equitex and
nMortgage concerning the Merger. The closing of the Merger is subject to, among
other things, successful completion of due diligence, obtaining the approval of
our shareholders and of the certain governmental authorities, as well as other
customary pre-closing conditions.
Under the proposed Merger, we must sell or otherwise dispose of our
gaming assets immediately prior to the consummation of the Merger. We have held
exploratory talks with several gaming manufacturers with a goal of selling the
gaming machine business intact to a company completely capable of effectively
marketing our recently-approved video slot machine and multi-player games line.
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nMortgage is a direct lender headquartered in Fort Lauderdale, Florida
and offers both retail and wholesale mortgage financing through its subsidiary
First Bankers Mortgage Services, Inc. nMortgage recently announced the debut of
its online mortgage system, known as "nMortgage.com." Upon the closing of the
merger, IGCA would be renamed "nMortgage.com, Inc."
THE OFFERING
<TABLE>
<S> <C>
Common stock offered (1) ................................... 2,009,500 shares
Common stock outstanding
before the offering....................................... 8,946,957 shares
Common stock outstanding
after the offering (2)................................... 10,956,457 shares
Nasdaq National Market symbol............................... IGCA
</TABLE>
(1) Represents the maximum number of shares that can be issued under the
Securities Purchase Agreement upon conversion of the Series D Preferred
Shares, payment of dividends in connection with the Series D Preferred
Shares and shares issuable upon exercise of the Warrants.
(2) Does not include (a) 94,424 shares of common stock that are reserved
for issuance upon the conversion of outstanding Series B Convertible
Preferred Stock; (b) 942,145 shares of common stock that are reserved
for issuance upon the conversion of outstanding Series C Convertible
Preferred Stock; (c) 1,369,775 shares of common stock that are issuable
upon exercise of outstanding options pursuant to the employee and
director stock option plans; (d) 1,145,000 shares of common stock that
are issuable upon the exercise of the outstanding warrants (other than
the Warrants); and (e) 2,133,332 shares of common stock that are
issuable upon the conversion of certain convertible promissory notes.
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<PAGE> 6
RISK FACTORS
An investment in our common stock is very risky. You may lose the
entire amount of your investment. Prior to making an investment decision, you
should carefully review this entire prospectus and consider the following risk
factors:
WE HAVE INCURRED LOSSES TO DATE AND IF OUR SALES DO NOT IMPROVE, WE
WILL NEED ADDITIONAL FINANCING IN ORDER TO CONTINUE OPERATIONS.
We have incurred net losses of approximately $4.7 million in 1998, $2.9
million in 1997 and $6.9 million in 1996 and had a net loss of approximately
$6.6 million during the nine months ended September 30, 1999. We have not had a
profitable quarter since the fourth quarter of fiscal 1997. As of January 7,
2000, we had cash and cash equivalents of approximately $330,000. We believe
that our cash and anticipated funds from operations will be adequate to fund
cash requirements until the completion of the merger with nMortgage, which is
planned to occur in the first quarter of 2000. If the merger is not completed as
planned, we will require additional financing to fund further production,
marketing and distribution of our products. There can be no assurance that we
will be successful on obtaining such additional financing on terms acceptable to
us, which may require us to consider liquidating all or a part of our assets and
possibly discontinuing operations. In connection with the 1999 refinancing, we
issued convertible promissory notes secured by certain of our assets. Security
interests held by the holders of such promissory notes could restrict our
ability to raise additional financing. Any new investors may seek and obtain
substantially better terms than were granted to its present investors and the
issuance of such securities would result in dilution to its existing
shareholders.
THERE IS THE RISK THAT DUE TO THE LIMITATIONS PLACED ON THE CONVERSION
OF THE PREFERRED SHARES, THE PREFERRED SHAREHOLDER'S INVESTMENT MAY NOT BE
CONVERTED INTO COMMON STOCK AND WOULD HAVE TO BE REDEEMED IN CASH.
The total number of shares of Common Stock issuable (1) upon conversion
of the Series D Preferred Stock, (2) as a dividend on the Series D Preferred
Shares, and (3) upon exercise of the Warrants cannot exceed 20% of the number of
shares of Common Stock of the Company issued and outstanding on September 1,
1999. In the event the holders of Preferred Shares are unable to convert shares
of the Preferred Shares into common stock because these limitations have been
reached, the Company would be required to redeem the Preferred Shares in cash at
135% of the stated value plus any accrued and unpaid dividends. It is possible
that in such case the Company may not possess sufficient cash and cash
equivalents necessary to redeem the Series D Preferred Shares in cash. A similar
but separate risk exists with the Company's Series C Preferred Shares.
The total number of shares of common stock issuable upon conversion of
the Series C Preferred Shares cannot exceed 1,331,500 shares, which amount
represents 20% of our common stock outstanding on June 1, 1999. If a holder of
Series C Preferred Shares is unable to convert those shares into common stock
because these limitations have been reached, we would be required to redeem the
Series C Preferred Shares in cash at 115% of the amount paid for those shares
plus any accrued and unpaid dividends. Depending on the number of shares we are
required to redeem, we may lack sufficient cash to accomplish the required
redemption.
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OUR OPERATIONS MAY PROVE UNSUCCESSFUL WHICH WOULD RESULT IN CONTINUED
UNPROFITABILITY AND MAY CAUSE OUR STOCK PRICE TO FALL.
We have not generated a profitable year since the fiscal year ended
July 31, 1994. Due to a variety of factors, many of which are discussed in this
prospectus, we may never generate significant revenues or operate profitability.
Even if we succeed in our operations as contemplated, we cannot assure a
successful transition to higher volume operations. We may be unable to control
our expenses, attract necessary additional personnel, or procure the capital
required to maintain expanded operations. If our sales growth is ultimately
unsuccessful, the results of our operations will suffer accordingly, and the
market price of our stock may fall.
WE CONTINUE TO FACE RISKS, EXPENSES AND DIFFICULTIES ASSOCIATED WITH
NEW AND EXPANDING BUSINESSES.
Although our business was formed in 1991, we continue to face the
risks, expenses and difficulties frequently encountered by new and expanding
businesses. These risks include, but are not limited to, negative cash flow,
initial high development costs of new products without corresponding sales
pending receipt of corporate and product regulatory approvals and market
introduction and acceptance of new products. We cannot guarantee that our
products will be accepted in the marketplace or that we will be able to obtain
the regulatory approvals we require to conduct our business.
OUR COMMON STOCK COULD BE DELISTED FROM THE NASDAQ NATIONAL MARKET,
WHICH DELISTING COULD HINDER YOUR ABILITY TO OBTAIN ACCURATE QUOTATIONS AS TO
THE PRICE OF OUR COMMON STOCK, OR DISPOSE OF OUR COMMON STOCK IN THE SECONDARY
MARKET.
Although our common stock is currently listed on the Nasdaq National
Market, we cannot guarantee that an active public market for our common stock
will continue to exist. The market price of our Common Stock has been highly
volatile. In order to maintain our listing on the Nasdaq National Market, we
must maintain a closing sales price of at least $1.00 per share for a certain
period of time. Since January 2, 1999, our Common Stock has traded in the range
of $0.81 to $2.75 per share. In the event our securities are delisted from the
Nasdaq National Market, trading, in our common stock could thereafter be
conducted in the over-the-counter markets in the so-called "pink sheets" or the
National Association of Securities Dealer's "Electronic Bulletin Board."
Consequently, the liquidity of our common stock would likely be impaired, not
only in the number of shares which could be bought and sold, but also through
delays in the timing of the transactions, reduction in the coverage of IGCA by
security analysts and the news media, and lower prices for our securities than
might otherwise prevail. In addition, our common stock would become subject to
certain rules of the Securities and Exchange Commission relating to "penny
stocks." These rules require broker-dealers to make special suitability
determinations for purchasers other than established customers and certain
institutional investors and to receive the purchasers' prior written consent for
a purchase transaction prior to sale. Consequently, these "penny stock rules"
may adversely affect the ability of broker-dealers to sell our common stock and
may adversely affect your ability to sell shares of our common stock in the
secondary market.
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THE CONVERSION OF PREFERRED SHARES INTO SHARES OF OUR COMMON STOCK MAY
SIGNIFICANTLY DILUTE THE INTERESTS OF OUR OTHER INVESTORS.
We issued $1.4 million in Series C Preferred Shares to an institutional
investor in June 1999, of which $900,000 was still issued and outstanding as of
January 10, 2000. As of January 10, 2000, we have issued and outstanding
approximately $280,000 in Series B Convertible Preferred Stock (the "Series B
Preferred Shares," and collectively with the Series C Preferred Shares and the
Series D Preferred Shares, the "Preferred Shares"). In October 1999, we issued
$2,450,000 in Series D Preferred Shares, of which $1,612,500 were issued and
outstanding as of January 10, 2000. The Series B and Series C Preferred Shares
are convertible into our common stock at a conversion price equal to 91% of the
average of the lowest three consecutive day closing bid price over the 20 day
period prior to conversion. Series D Preferred Shares are convertible into
common stock at the lesser of $3.00 or 75% of the average closing bid price for
the five consecutive days immediately preceding the conversion date. The Series
C Preferred Share terms prohibit issuing more than 1,331,500 shares of common
stock upon conversion of the Series C Preferred Shares at a discount and the
Series B Preferred Share terms prohibit issuing more than 1,505,000 shares of
common stock upon conversion of Series B Preferred Shares at a discount and also
limit the ability of the holder to convert if, following the conversion, such
holder would own in excess of 4.9% of our common stock. A decline in the stock
price of common stock could result in dilution to investors if the holders of
Preferred Shares convert.
PURSUANT TO ITS AUTHORITY TO DESIGNATE AND ISSUE SHARES OF OUR STOCK AS
IT DEEMS APPROPRIATE, OUR BOARD OF DIRECTORS MAY ASSIGN RIGHTS AND PRIVILEGES TO
CURRENTLY UNDESIGNATED SHARES WHICH COULD ADVERSELY AFFECT YOUR RIGHTS AS A
COMMON SHAREHOLDER.
Our authorized capital consists of 100,000,000 shares of capital stock.
Our Board of Directors, without any action by the shareholders, may designate
and issue shares in such classes or series (including classes or series of
preferred stock) as it deems appropriate and establish the rights, preferences
and privileges of such shares, including dividends, liquidation and voting
rights. The rights of holders of preferred shares and other classes of capital
stock that may be issued may be superior to the rights granted to the holders of
our common stock. Our Board's ability to designate and issue such undesignated
shares could impede or deter an unsolicited tender offer or takeover proposal.
Further, the issuance of additional shares having preferential rights could
adversely affect the voting power and other rights of holders of common stock.
WE ARE DEPENDENT ON THE ONGOING SERVICES OF CERTAIN OF OUR EXECUTIVES,
THE LOSS OF WHICH COULD HAVE A DETRIMENTAL EFFECT ON OUR PROFITABILITY AND THE
MARKET PRICE OF OUR STOCK.
Our business and our day-to-day operations rely heavily upon the
experience, personal efforts and abilities of Edward G. Stevenson, our Chairman
of the Board and Chief Executive Officer, and Barrett Johnson, our President and
Chief Operating Officer. Each of these executives has significant experience in
managing and guiding the business affairs of companies in the gaming machine
industry. The loss of any member of management could adversely affect the
success of our operations and strategic plans and, consequently, have a
detrimental effect on the market price of our stock.
WE MAY NOT PAY DIVIDENDS ON OUR COMMON STOCK, IN WHICH EVENT YOUR ONLY
RETURN ON INVESTMENT, IF ANY, WILL OCCUR ON THE SALE OF OUR STOCK.
To date, we have not paid any cash dividends on our common stock, and
we do not intend to do so in the foreseeable future. Rather, we intend to use
any future earnings to fund our operations and the growth of our business.
Accordingly, the only return on an investment in our common stock will occur
upon its sale.
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<PAGE> 9
MINNESOTA LAW MAY INHIBIT OR DISCOURAGE TAKEOVERS, WHICH COULD REDUCE
THE MARKET VALUE OF OUR STOCK.
Being a corporation organized under Minnesota law, we are subject to
certain Minnesota statutes which regulate business combinations and restrict the
voting rights of certain persons acquiring shares of our stock. By impeding a
merger, consolidation, takeover or other business combination involving
Innovative Gaming Corporation of America or discouraging a potential acquiror
from making a tender offer or otherwise attempting to obtain control of us,
these regulations could adversely affect the market value of our stock.
POTENTIAL ADVERSE MARKET PRICE IMPACT OF SHARES ELIGIBLE FOR FUTURE
SALE.
The sale, or availability for sale, of substantial amounts of our
common stock in the public market subsequent to this offering of common stock
may adversely affect the prevailing market price of common stock and may impair
whether we can raise additional capital by the sale of stock. As of January 10,
2000, we had 8,946,957 shares of common stock outstanding. In addition, as of
January 10, 2000, we had 1,369,775 shares of common stock subject to outstanding
options granted under its employee and director stock option plans, 1,145,000
shares of common stock subject to outstanding warrants (other than the Warrants)
and 2,133,332 shares of common stock issuable upon conversion of convertible
promissory notes.
OUR CONTEMPLATED ACQUISITION OF NMORTGAGE.COM, INC. MAY NOT COME TO
FRUITION.
Although we have executed a definitive agreement to acquire
nMortgage.com, Inc., we can give no assurance that the acquisition of nMortgage
will come to fruition. Closing of the proposed transaction is subject to, among
other things, due diligence, completion of certain additional documents,
obtaining corporate and any necessary regulatory approvals, approval by the IGCA
stockholders, and other customary pre-closing conditions. The failure to
successfully complete any of these conditions could prevent the consummation of
the nMortgage transaction.
If we successfully complete the nMortgage transaction, then the factors
identified below under "Risks Associated with the Internet Mortgage Business"
will apply to our business. On the other hand, if we are unable to complete the
nMortgage transaction, then we will continue to operate our gaming business and
the factors listed below under "Risks Associated with the Gaming Machine
Business" will continue to apply to our business.
RISKS ASSOCIATED WITH THE INTERNET MORTGAGE BUSINESS
WE MAY BE ENTERING INTO A NEW BUSINESS VENTURE IN AN EVOLVING INDUSTRY
IN WHICH WE HAVE NO EXPERIENCE.
The lending business, and the Internet mortgage business, in
particular, represent a significant change in our business operations from the
gaming machine business. We and our present management also have no experience
with the business of providing such lending services. Furthermore, the Internet
industry is rapidly evolving, extremely competitive, and the market place for
Internet-related shares has been very volatile.
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INTERNET MORTGAGE BUSINESSES ARE SUBJECT TO INTEREST RATE FLUCTUATIONS,
WHICH COULD HAVE AN ADVERSE IMPACT ON THE BUSINESS.
If our proposed transaction with nMortgage is consummated, a high
percentage of our customers would use our services to refinance existing
mortgages and would be motivated to do so primarily when interest rates fall
below the rates of their existing mortgages. In the event interest rates
significantly increase, consumers' incentive to refinance will be greatly
reduced and the number of loans that we would originate could significantly
decline. Our failure to successfully reduce this dependence on refinancings and
increase the volume of our business derived from home purchases could have an
adverse effect on our business.
Our ability to engage in profitable secondary sales of loans could also
be adversely affected by increases in interest rates. The mortgage loan purchase
commitments we would obtain are contingent upon delivery of the relevant loans
to the purchasers within specified periods. To the extent that we would be
unable to deliver the loans within the specified periods and interest rates
increase, we may experience no gain or even a loss on the sale of these loans.
In addition, any increase in interest rates will increase the cost of
maintaining our warehouse and repurchase lines of credit which we depend on to
fund the loans we originate. To the extent we do not use derivative financial
instruments to hedge these risks, we would be exposed to losses caused by
fluctuations in interest rates.
UNCERTAINTY WITH RESPECT TO THE TIME IT TALES TO CLOSE LOANS CAN LEAD
TO UNPREDICTABLE REVENUE AND PROFITABILITY.
In the Internet mortgage business, the time between the date an
application is received from a customer, via the Internet, and the date the loan
closes has typically been lengthy and unpredictable. The loan application and
approval process can often be delayed due to factors over which we would have
little or no control, including the timing of the customer's decision to commit
to an available interest rate, the close of escrow date for purchase loans, the
timeliness of appraisals and the adequacy of the customer's own disclosure
documentation. This uncertain timetable could have a direct impact on our
revenue and profitability for any given period. We may expend substantial funds
and management resources supporting the loan completion process and never
generate revenue from closed loans. Therefore, our results of operations for a
particular period may be adversely affected if the loans applied for during that
period do not close in a timely manner or at all. Purchase loan applications
generally take longer to close than refinancing applications as they are tied to
the close of escrow date.
OUR BUSINESS MAY EXPERIENCE SUBSTANTIAL GROWTH IN THE INTERNET MORTGAGE
INDUSTRY, AND IF WE ARE UNABLE TO MANAGE THIS GROWTH, OUR BUSINESS WILL BE
ADVERSELY AFFECTED.
Assuming the proposed transaction with nMortgage is consummated, we may
experience periods of significant growth, which may place a strain on our
resources. If we do not manage this potential growth effectively, it could
adversely affect our business. We may not be successful in managing or expanding
our operations or maintaining adequate management, financial and operating
systems and controls.
IF ONLINE MORTGAGE SERVICES DO NOT ACHIEVE WIDESPREAD CUSTOMER
ACCEPTANCE, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
Assuming the consummation of the transaction with nMortgage, our
success in the Internet mortgage business will depend, in large part, on
widespread consumer acceptance of purchasing mortgages online. The development
of an online market for mortgage loans has only recently begun, is rapidly
evolving and likely
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will be characterized by an increasing number of market entrants. Our future
growth, if any, will depend on the following critical factors:
- the growth of the Internet as a commerce medium generally, and
as a market for consumer financial products and services
specifically;
- our ability to successfully and cost-effectively market our
services to a sufficiently large number of customers; and
- our ability to overcome a perception among many real estate
market participants that obtaining mortgages online is risky
for consumers.
There can be no assurance that the market for our services will
develop, that our services will be adopted or that consumers will significantly
increase their use of the Internet for obtaining mortgage loans. If the online
market for mortgage loans fails to develop, or develops more slowly than
expected, or if our services do not achieve widespread market acceptance, our
business, results of operations and financial condition would be adversely
affected.
WE WILL BE RELYING ON THE TIMELY AND COMPETENT SERVICES OF VARIOUS
COMPANIES INVOLVED IN THE MORTGAGE PROCESS; IF THESE COMPANIES FAIL TO TIMELY
AND COMPETENTLY DELIVER THESE SERVICES, OUR BUSINESS REPUTATION WOULD BE
DIRECTLY AND ADVERSELY AFFECTED.
We will rely on other companies to perform services related to the loan
underwriting process, including appraisals, credit reporting and title searches.
Any interruptions or delays in the provision of these services may cause delays
in the processing and closing of loans for our customers. If we are unsuccessful
in managing the timely delivery of these services we will likely experience
increased customer dissatisfaction and our business could be adversely affected.
WE MAY INCUR LOSSES ON LOANS IF WE BREACH REPRESENTATIONS OR WARRANTIES
TO MORTGAGE LOAN PURCHASERS.
In connection with the sale and exchange of loans, we will be making
customary representations and warranties to mortgage loan purchasers relating
to, among other things, compliance with laws and origination practices. In the
event we were to breach any of these representations and warranties, we could be
required to repurchase or substitute these mortgage loans and bear any
subsequent losses on the repurchased loans. We could also be required to
indemnify mortgage loan purchasers for these losses and claims with respect to
mortgage loans for which there was a breach of representations and warranties.
THE MORTGAGE LENDING INDUSTRY IS INTENSELY COMPETITIVE, AND IF WE FAIL
TO SUCCESSFULLY COMPETE IN THIS INDUSTRY, OUR BUSINESS WOULD BE ADVERSELY
AFFECTED.
To compete successfully in the mortgage lending industry, and in
particular in the Internet mortgage business, we must respond promptly and
effectively to the challenges of technological change, evolving standards and
our competitors' innovations by continuing to enhance and expand our services,
as well as our sales and marketing channels. Increased competition, particularly
online competition, could result in price reductions, reduced margins or loss of
market share, any of which could adversely affect our business. We may not be
able to compete successfully in this market environment and our failure to do so
could have an adverse effect on our business, results of operations and
financial condition.
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IF WE FAIL TO COMPLY WITH THE NUMEROUS LAWS AND REGULATIONS THAT GOVERN
THE MORTGAGE LENDING INDUSTRY, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Assuming the transaction with nMortgage is consummated, our business
must comply with extensive and complex rules and regulations of, and licensing
and examination by, various federal, state and local government authorities.
These rules impose obligations and restrictions on our residential loan
brokering and lending activities. In particular, these rules limit the broker
fees, interest rates, finance charges and other fees we may assess, require
extensive disclosure to our customers, prohibit discrimination and impose on us
multiple qualification and licensing obligations. We may not always be in
compliance with these requirements. Failure to comply with these requirements
may result in, among other things, revocation of required licenses or
registrations, loss of approved status, voiding of loan contracts or security
interests, indemnification liability or the obligation to repurchase mortgage
loans sold to mortgage loan purchasers, rescission of mortgage loans, class
action lawsuits, administrative enforcement actions and civil and criminal
liability.
ANY ACQUISITIONS THAT WE WOULD UNDERTAKE COULD BE DIFFICULT TO
INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT
OUR OPERATING RESULTS
We may acquire or make investments in businesses, technologies,
services or products that are complimentary to the Internet mortgage business.
These acquisitions and investments could disrupt our ongoing business, distract
our management and employees and increase our expenses. If we acquire a company,
we could have difficulty in assimilating that company's personnel, operations,
technology and software. In addition, the key personnel of the acquired company
may decide not to work for us. We could also have difficulty in integrating the
acquired products, services or technologies into our operations and we may incur
indebtedness or issue equity securities to pay for any future acquisitions.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO
SUCCEED
Competition for personnel throughout the Internet mortgage industry,
and the mortgage lending industry in general, is intense. We may be unable to
retain key employees or attract, assimilate or retain other highly qualified
employees in the future. Our future success will depend on our continuing to
attract, retain and motivate highly skilled employees, particularly with respect
to our loan processing functions.
OUR BUSINESS WOULD BE IMPAIRED IF CONSUMERS DO NOT CONTINUE TO USE THE
INTERNET.
Our business would be adversely affected if Internet usage does not
continue to grow, particularly by homebuyers. A number of factors may inhibit
Internet usage by consumers, including inadequate network infrastructure,
security concerns, inconsistent quality of service, and lack of availability of
cost-effective, high-speed service. If Internet usage grows, the Internet
infrastructure may not be able to support the demands placed on it by this
growth and its performance and reliability may decline. In addition, many
websites have experienced service interruptions as a result of outages and other
delays occurring throughout the Internet infrastructure. If these outages or
delays frequently occur in the future, Internet usage, as well as the usage of
our website, could grow more slowly or decline.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO EXPAND AND PROMOTE OUR
BRAND RECOGNITION
Establishing and maintaining our brand will be critical to attracting
and expanding a customer base, solidifying business relationships and
successfully implementing our proposed business strategy. We cannot assure you
that our brand will be positively accepted by the market or that our reputation
will be strong.
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<PAGE> 13
Promotion and enhancement of our brand will also depend, in part, on
our success in providing a high-quality customer experience. We cannot assure
you that we will be successful in achieving this goal. If potential visitors to
our website do not perceive our proposed services to be of high quality or if we
alter or modify our brand image, introduce new services or enter into new
business ventures that are not favorably received, the value of our brand could
be diluted, thereby decreasing the attractiveness of our service to potential
customers.
IF WE ARE UNABLE TO ADAPT TO THE RAPID TECHNOLOGICAL CHANGE THAT
CHARACTERIZES THE INTERNET MORTGAGE INDUSTRY, OUR BUSINESS WILL SUFFER.
Our future success will depend on our ability to adapt to rapidly
changing technologies by continually improving the performance features and
reliability of our services. We may be relying on third party software products
and services and if we are unable to integrate this software in a fully
functional manner, we may experience difficulties that could delay or prevent
the successful development, introduction or marketing of new products and
services. In addition, enhancements of our products and services must meet the
requirements of our prospective customers and must achieve significant market
acceptance. We could also incur substantial costs if we need to modify our
services or infrastructure to adapt to these changes.
ANY OUTAGES, DELAYS OR OTHER DIFFICULTIES EXPERIENCED BY THE INTERNET
SERVICE PROVIDERS, ONLINE SERVICE PROVIDERS OR OTHER WEBSITE OPERATORS ON WHICH
OUR USERS DEPEND COULD ADVERSELY AFFECT OR BUSINESS.
Our website may be subject to occasionally experiencing slower response
times or decreased traffic for a variety of reasons. In addition, our users will
be dependent on Internet service providers, online service providers and other
website operators for access to our websites. Many of them have experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to our systems. Additionally, the
Internet infrastructure may not be able to support continued growth in its use.
Any of these problems could adversely affect our business.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO SAFEGUARD
THE SECURITY AND PRIVACY OF OUR CUSTOMERS' FINANCIAL DATA.
Internet usage could decline if any well-publicized compromise of
security occurred. We may incur significant costs to protect against the threat
of security breaches or to alleviate problems caused by any breaches that occur.
We also plan to retain on our premises personal financial documents that we will
receive from prospective borrowers in connection with their loan applications.
These documents are highly sensitive and if a third party were to misappropriate
our customers' personal information, customers could possibly bring legal claims
against us. We cannot assure you that our privacy policy will be deemed
sufficient by our prospective customers or any federal or state laws governing
privacy which may be adopted in the future.
THERE IS SIGNIFICANT POTENTIAL FOR DILUTION OF INVESTORS INTERESTS DUE
TO THE NMORTGAGE.COM, INC. TRANSACTION.
If the acquisition nMortgage.com, Inc. is completed, our current
shareholders could experience significant ownership dilution. Furthermore, this
new business could require additional financing which could dilute shareholdings
even further.
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<PAGE> 14
RISKS ASSOCIATED WITH THE GAMING MACHINE INDUSTRY
OUR SUCCESS DEPENDS IN LARGE PART UPON OUR ABILITY TO DESIGN,
MANUFACTURE, MARKET AND SERVICE PRODUCTS THAT WILL BE ACCEPTED IN THE GAMING
MACHINE MARKET.
Our success as a gaming machine manufacturer and supplier is dependent
upon numerous factors, including our ability to design, manufacture, market and
service gaming machines that achieve player and casino acceptance while
maintaining product quality and acceptable margins. In addition, we must compete
against gaming machine suppliers with greater financial resources, name
recognition and established service networks, customer relationships and
licensed in more jurisdictions. To date, the sales of our multi-player games
have been significantly lower than we anticipated. In order to diversify and
expand sales, we have begun licensing, marketing and selling single player games
such as Bonus Streak and Mythical Reels. We have also begun the development of
other single player games such as Revolving Rings. We cannot assure you that
these single player games will be accepted by the market. We will need to
develop gaming machines that offer technological advantages or unique
entertainment features in order for us to be able to compete effectively in the
gaming machine market.
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN THE SINGLE PLAYER GAMES
MARKET, FOR WHICH WE ARE CURRENTLY DEVELOPING PRODUCTS, OR WITH COMPETITORS WHO
DEVELOP GAMING MACHINES THAT ARE SIMILAR TO OUR MULTI-STATION PRODUCTS.
Many gaming equipment companies, several of which are large and
well-established, supply the casino and video lottery industries with video
gaming machines and other gaming equipment. Our management believes that
Aristocrat, Alliance Gaming, International Game Technology, Anchor Gaming and
WMS Industries are among the largest and most-established gaming machine
suppliers. Sigma Games distributes a multi-player horserace game, which our
management believes competes for the same casino floor space as our games.
Additionally, Sega Gaming also offers similar games in a multi-player format and
has applied for licensure in certain U.S. markets. Upon licensing, we believe
Sega Gaming will become a direct competitor. However, these competitors, or
another competitor, may develop gaming machines that are similar to our gaming
machines in the future. Furthermore, we cannot assure you that any of the single
player games we are currently developing for the intensely competitive single
player game market will be accepted in such a competitive market.
AS WITH OTHER BUSINESSES IN THE GAMING INDUSTRY, OUR PROFITABILITY AND
OUR POTENTIAL FOR GROWTH ARE HIGHLY DEPENDENT ON MANY FACTORS WHICH ARE OUT OF
OUR CONTROL.
Our revenues are derived from the gaming industry. The growth of our
business is substantially dependent upon factors that are beyond our the
control. Such factors include, among others, the pace of development, changes in
gaming regulation, expansion and renovation of casinos and other forms of casino
gaming in new jurisdictions, and the continued popularity of casino gaming as a
leisure activity. The expansion of the gaming industry has slowed in recent
years and the continued expansion of gaming markets is dependent upon political,
legal and other factors, which are beyond our control. As a result of these and
other factors, we cannot assure you that we will be able achieve planned growth
or profitability.
THE LOSS OF ORDERS OR THE INABILITY TO OBTAIN NEW ORDERS COULD CAUSE
SIGNIFICANT FLUCTUATIONS IN OUR REVENUES AND CASH FLOW AND ADVERSELY AFFECT OUR
OPERATING RESULTS AS A WHOLE.
Our operating results have varied substantially from quarter to
quarter. Revenues in any quarter are substantially dependent on regulatory
approval, receipt of orders, availability of parts and components
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<PAGE> 15
necessary to manufacture the products, delivery and installation in that
quarter. Our staffing and operating expenses are based on anticipated revenue
levels, and a high percentage of our costs are fixed, in the short-term. As a
result, the loss of any one order, or the failure to obtain new orders as
existing orders are completed, could have a material adverse effect on, or cause
significant fluctuations in, our revenues and cash flow from quarter to quarter.
OUR OPERATIONS ARE DEPENDENT UPON OUR RELATIONSHIPS WITH OUR VENDORS,
SUPPLIERS AND DISTRIBUTORS.
We are highly dependent upon our relationships with our vendors,
suppliers and distributors. A significant interruption or delay in the delivery
of components from our suppliers, or the loss of a significant distributor,
could materially and adversely affect the results of our operations.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION WHICH COULD
NEGATIVELY IMPACT OUR BUSINESS.
The manufacture and distribution of gaming machines are subject to
numerous federal, state, provincial, tribal, international and local
regulations. These regulations are constantly changing and evolving, and may
permit additional gaming or curtail gaming in various jurisdictions in the
future, which may have a material adverse impact on us. The timing and expense
of obtaining gaming licenses has an affect on our ability to expand our market.
Together with our key personnel, we undergo extensive investigation before each
jurisdictional license is issued. Our gaming machines are subjected to
independent testing and evaluation prior to approval from each jurisdiction in
which we do business. Generally, regulatory authorities have broad discretion
when granting, renewing or revoking such game approvals and licenses. Our
failure, or the failure of any of our key personnel or gaming machines, in
obtaining or retaining a license in any jurisdiction could have a material
adverse effect on our business. Furthermore, the failure to obtain or retain a
required license in one jurisdiction could negatively impact our ability (or the
ability of any of our key personnel or gaming machines) to obtain or retain
required licenses in other jurisdictions. In addition, we may also be subject to
regulation as a gaming operator if we enter into lease participation agreements
under which we share in the revenues generated by gaming machines. Regulatory
authorities may require significant shareholders to submit to background
investigations and respond to questions from regulatory authorities, and may
deny a license or revoke our licenses based upon their findings. For a more
complete description of the gaming regulations impacting us, you should refer to
the Regulation section of our Form 10-K for the fiscal year ended December 31,
1998.
THERE IS A RISK THAT THE VALUE OF OUR PROPRIETARY INTELLECTUAL PROPERTY
RIGHTS COULD BE DIMINISHED BY IMPROPER USE BY OTHERS.
Our products are technology-based and as such, we face several
intellectual property risks. We believe that our proprietary software, hardware
and other intellectual property are important to our success and our competitive
position. We rely on a combination of patent, trade secret, copyright and
trademark law, nondisclosure agreements and technical security measures to
protect our rights pertaining to our products. We currently hold patents for our
blackjack, craps and roulette machines. However, the actions we have taken to
protect our proprietary rights may be inadequate to prevent others from
imitating our products. For instance, we may not be granted patents for products
that we develop in the future. Even if we are granted patents for our products,
we may still be unable to prevent third parties from being able to copy or to
"reverse engineer" certain portions of our products or to obtain and use
information that we believe is proprietary.
Although we are not aware of any infringement, we may be subject to
claims from third parties alleging that we have infringed their proprietary
intellectual property rights. Such claims could have a material adverse effect
on our business given the costs associated with intellectual property
litigation, the
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<PAGE> 16
potential diversion of our management's resources to litigation and the risk of
an injunction or other delay in the offering of our products.
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USE OF PROCEEDS
The Company received gross proceeds of $2,450,000 from the sale of the
Series D Preferred Shares. The gross proceeds to the Company from the exercise
of the warrants, if the warrants are exercised in full, would be a maximum of
$941,875. The proceeds from the exercise of the warrants are intended to be used
for working capital purposes. The Company will not receive any proceeds from the
sale of the common stock by the selling shareholders.
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<PAGE> 18
SELLING SHAREHOLDERS
The following table sets forth the number of shares of the common stock
owned by the selling shareholders as of January 10, 2000 and after giving effect
to this offering. We will not receive any proceeds from the sale of the common
stock by the selling shareholders. The shares of common stock received upon
exercise of the Warrants may be offered from time to time by the selling
shareholders.
<TABLE>
<CAPTION>
Shares Percentage Number of Percentage
Beneficially Beneficial Shares Offered by Beneficial
owned before Ownership Selling Ownership After
Name Offering Before Offering Shareholder Offering
- --------------------------- -------- --------------- ----------- --------
<S> <C> <C> <C> <C>
The Shaar Fund, Ltd. 1,134,705(1) 12.3% 353,964(2) 7.1%
Augustine Fund, PL 353,964 3.8% 353,964 0.0%
Barry Seidman 322,591 3.6% 322,591 0.0%
Levana Fund 226,258 2.5% 226,258 0.0%
Zakeni Limited 176,982 1.9% 176,982 0.0%
Blakely Trading, Ltd. 90,503 1.0% 90,503 0.0%
Dale Sleen, DDS-IRA 90,503 1.0% 90,503 0.0%
Brad Blumenthal 45,252 * 45,252 0.0%
C. Jesse Reggio 45,252 * 45,252 0.0%
World Capital Funding, Inc., LLC 45,252 * 45,252 0.0%
Lucy Birkemeier 35,396 * 35,396 0.0%
Jimmy Dowda 35,396 * 35,396 0.0%
Taurus Enterprises, LLC 20,163 * 20,163 0.0%
Four Corp. Employees Defined Cont Plan/Trust 20,163 * 20,163 0.0%
Cynthia Frank 20,163 * 20,163 0.0%
Ronnie L. Williams Sr. 17,698 * 17,698 0.0%
Fong Charitable Foundation 25,000 * 25,000 0.0%
Wyncrest Capital 25,000 * 25,000 0.0%
Vista Gaming 50,000 * 50,000 0.0%
Grogen Financial 10,000 * 10,000 0.0%
- ------------
*Less than 1%.
</TABLE>
(1) Includes (i) 40,000 shares of common stock beneficially owned by the
selling shareholder; (ii) 303,964 shares of common stock issuable upon
conversion of the Series D Preferred Shares; (iii) a maximum of 94,424
shares of common stock issuable upon conversion of the Series B Convertible
Preferred Stock, and upon payment of dividends in connection with the
Series B Preferred Shares, (iv) 646,317 shares remaining to be issued upon
conversion of the Series C Preferred Shares and upon payment of dividends
in connection with the Series C Preferred Shares and (v) 50,000 shares
issuable upon the exercise of warrants.
(2) Represents the maximum number of shares to be issued pursuant to the
Securities Purchase Agreement. Includes shares issuable upon conversion of
the Series D Preferred Shares, shares issuable upon payment of dividends in
connection with the Series D Preferred Shares, and 50,000 shares issuable
upon exercise of warrants. Does not include shares issuable upon conversion
of Series B Preferred Shares or Series C Preferred Shares.
During October 1999, we issued a total of 2,450 shares of Series D
Convertible Preferred Stock at a price of $1,000 per share in a private
placement for total proceeds of $2,450,000, prior to any offering expenses, and
warrants to acquire 245,000 shares of our common stock at $2.75 per share. An
annual dividend of 6 percent shall be paid quarterly in arrears either in common
stock or cash at our discretion. Each share of Series D Preferred Stock is
convertible into shares of our common stock at a conversion price
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<PAGE> 19
of the lesser of $3.00 or 75 percent of the closing average bid price of our
common stock for the five consecutive trading days immediately preceding the
conversion date. We have reserved 1,750,000 shares of common stock for issuance
upon conversion of the Series D Preferred Stock and 245,000 shares of common
stock to be issued upon the exercise of the warrants. We have the right to
redeem the Series D Preferred Stock at 135 percent of par in cash if the market
price is lower than the market price on the date that the Series D Preferred
Stock was issued. All outstanding shares of Series D Preferred Stock will be
automatically converted into common stock in October 2004. A holder of Series D
Preferred Stock may not convert such stock into common stock if, following such
conversion, the holder beneficially owns greater than 4.9 percent of our common
stock. If, notwithstanding the foregoing, such holder is deemed by a court to be
the beneficial owner of more than 5% of the Company's common stock, the Company
is required to redeem for cash such number of shares of Series D Preferred
Shares as will reduce such holder's ownership to not more than 5% at a
redemption price equal to 125% of the stated value plus accrued and unpaid
dividends. In the case of mandatory conversion, the Company may elect to pay a
redemption price in cash equal to 135% of the stated value plus accrued and
unpaid dividends or may extend the mandatory conversion date for one year.
PLAN OF DISTRIBUTION
We are registering the shares offered by this prospectus in part on
behalf of the selling shareholders. We agreed to file a registration statement
under the Securities Act of 1933, as amended (the "Securities Act") covering
resale by the selling shareholders of the shares and to use our best efforts to
cause such registration statement to be declared effective as soon as possible
thereafter. As used in this section, the term "selling shareholders" includes
donees, pledgees, transferees and other successors in interest selling shares
received from a selling shareholder after the date of this prospectus. We will
pay all costs and expenses in connection with the preparation of this prospectus
and the registration of the shares offered by it. Any brokerage commissions and
similar selling expenses attributable to the sale of shares will be borne by the
selling shareholders. Sales of shares may be effected by the selling
shareholders at various times in one or more types of transactions (which may
include block transactions) on the Nasdaq National Market, in negotiated
transactions, through put or call options transactions relating to the shares,
through short sales of shares, or a combination of such methods of sale at
market prices prevailing at the time of sale or at negotiated prices. Such
transactions may or may not involve brokers or dealers. The selling shareholders
have advised us that they have not entered into any agreements, understandings
or arrangements with any underwriters or broker-dealers regarding the sale of
the shares, nor is there an underwriter or coordinating broker acting in
connection with the proposed sale of shares by the selling shareholders.
We have agreed to indemnify the selling shareholders and their
officers, directors, employees and agents, and each person who controls any
selling shareholder, in certain circumstances against certain liabilities,
including liabilities arising under the Securities Act. Each selling shareholder
has agreed to indemnify the Company and its directors and officers in certain
circumstances against certain liabilities, including liabilities arising under
the Securities Act.
The selling shareholders and any broker-dealers that act in connection
with the sale of securities might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, and any commissions received by
such broker-dealers and any profit on the resale of the securities sold by them
while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act.
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<PAGE> 20
Because selling shareholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the selling shareholders
will be subject to the prospectus delivery requirements of the Securities Act.
We have informed the selling shareholders that the anti-manipulative provisions
of Regulation M promulgated under the Securities Exchange Act of 1934, as
amended, may apply to their sales in the market.
Selling shareholders also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of that Rule.
MINNESOTA ANTI-TAKEOVER LAW
The Company is governed by the provisions of Sections 302A.671 and
302A.673 of the Minnesota Business Corporation Act. In general, Section 302A.671
provides that the shares of a corporation acquired in a "control share
acquisition" have no voting rights unless voting rights are approved in a
prescribed manner. A "control share acquisition" is an acquisition, directly or
indirectly, of beneficial ownership of shares that would, when added to all
other shares beneficially owned by the acquiring person, entitle the acquiring
person to have voting power of 20% or more in the election of directors. In
general, Section 302A.673 prohibits a publicly-held Minnesota corporation from
engaging in a "business combination" with an "interested shareholder" for a
period of four years after the date of transaction in which the person became an
interested shareholder, unless the business combination is approved in a
prescribed manner. "Business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
shareholder. An "interested shareholder" is a person who is the beneficial
owner, directly or indirectly, or 10% or more of the corporation's voting stock
or who is an affiliate or associate of the corporation and at any time within
four years prior to the date in question was the beneficial owner, directly or
indirectly, of 10% or more of the corporation's voting stock.
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires IGCA to file information with the
Securities and Exchange Commission concerning its business and operations.
Accordingly, we file annual, quarterly, and special reports, proxy statements
and other information with the Commission. You can inspect and copy this
information at the Public Reference Facility maintained by the Commission at
Judiciary Plaza, 450 5th Street, N.W., Room 1024, Washington, D.C. 20549. You
can also do so at the following regional offices of the Commission:
(1) New York Regional Office, 7 World Trade Center, Suite 1300, New York,
New York 10048
(2) Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661.
You can receive additional information about the operation of the
Commission's Public Reference Facilities by calling the Commission at
1-800-SEC-0330. The Commission also maintains a website at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding companies that, like IGCA, file information electronically with the
Commission.
The Commission allows us to "incorporate by reference" information that
has been filed with it, which means that we can disclose important information
to you by referring you to the other information we have filed with the
Commission. The information that we incorporate by reference is considered to be
part of this
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<PAGE> 21
prospectus, and related information that we file with the Commission will
automatically update and supersede information we have included in this
prospectus. We also incorporate by reference any future filings we make with the
Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, as amended, until the selling shareholders sell all of their shares
or until the registration rights of the selling shareholders expire. This
prospectus is part of a registration statement that we filed with the Commission
(Registration No. 333- ). The following are specifically incorporated
herein by reference:
1. Annual Report on Form 10-K for the fiscal year ended December
31, 1998;
2. Amended Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1998 as filed August 2, 1999;
3. Quarterly Reports on Form 10-Q filed on May 17, 1999, August
16, 1999 and November 15, 1999;
4. Current Reports on Form 8-K filed on June 7, 1999 and October
25, 1999; and
5. The description of common stock included under the caption
"Securities to be Registered" in the Company's registration
statement on Form SB-2 (registration No. 33-61492C), including
any amendments or reports filed for the purpose of updating
such description.
You can request a free copy of the above filings or any filings
subsequently incorporated by reference into this prospectus by writing or
calling us at the following address:
Innovative Gaming Corporation of America
Attention: Edward G. Stevenson, Chief Executive Officer
4275 Aircenter Circle
Reno, Nevada 89502
(775) 823-3000
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement or amendment to this prospectus.
We have not authorized anyone else to provide you with different information or
additional information. Selling shareholders will not make an offer of our
common stock in any state where the offer is not permitted. You should not
assume that the information in this prospectus, or any supplement or amendment
to this prospectus, is accurate at any date other than the date indicated on the
cover page of such documents.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this prospectus and in the documents
incorporated by reference in this prospectus are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements can be
identified by the use of predictive, future-tense or forward-looking
terminology, such as "believes," "anticipates," "expects," "estimates," "may,"
"will" or similar terms. Forward-looking statements also include projections of
financial performance, statements regarding management's plans and objectives
and statements concerning any assumption relating to the foregoing. Important
factors regarding IGCA's business, operations and competitive environment which
may cause actual results to vary materially from these forward-looking
statements are discussed under the caption "Risk Factors."
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LEGAL MATTERS
Legal matters in connection with the validity of the shares offered by
this Prospectus will be passed upon for the Company by Maslon Edelman Borman &
Brand, LLP, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of IGCA as of December 31, 1998,
December 31, 1997, and December 31, 1996 and for the year then ended
incorporated by reference and as of December 28, 1997 and for the year then
ended incorporated by reference in the registration statement of which this
prospectus is a part have been audited by Kafoury, Armstrong & Co., independent
public accountants, as indicated in their report with respect thereto, and are
incorporated herein in reliance upon the authority of that firm as experts in
giving said report.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Minnesota Statutes Section 302A.521 provides that a corporation shall
indemnify any person made or threatened to be made a party to any proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines, including, without limitation, excise taxes
assessed against such person with respect to an employee benefit plan,
settlements, and reasonable expenses, including attorney's fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person has not been indemnified by another organization or
employee benefit plan for the same expenses with respect to the same acts or
omissions; acted in good faith; received no improper personal benefit and
Section 302A.255, if applicable, has been satisfied; in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful; and in
the case of acts or omissions by persons in their official capacity for the
corporation, reasonably believed that the conduct was in the best interests of
the corporation, or in the case of acts or omissions by persons in their
capacity for other organizations, reasonably believed that the conduct was not
opposed to the best interests of the corporation. Subdivision 4 of Section
302A.521 of the Minnesota Statutes provides that a corporation's articles of
incorporation or bylaws may prohibit such indemnification or place limits upon
the same. The Company's articles and bylaws do not include any such prohibition
or limitation. As a result, the Company is bound by the indemnification
provisions set forth in Section 302A.521 of the Minnesota Statutes. As permitted
by Section 302A.251 of the Minnesota Statutes, the Articles of Incorporation of
the Company provide that a director shall, to the fullest extent permitted by
law, have no personal liability to the Company and its shareholders for breach
of fiduciary duty as a director.
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
22
<PAGE> 23
2,105,000 SHARES
INNOVATIVE GAMING CORPORATION OF AMERICA
COMMON STOCK
---------------------
PROSPECTUS
---------------------
[ ] , 2000
23
<PAGE> 24
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the issuance and distribution of the
securities registered hereby are set forth in the following table:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 938
Nasdaq National Market additional listing fee............... 17,500
Legal fees and expenses..................................... 10,000
Accounting fees and expenses................................ 1,000
Miscellaneous............................................... 562
----------
Total $ 30 ,000
===========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is governed by Minnesota Statutes Chapter 302A. Minnesota
Statutes Section 302A.521 provides that a corporation shall indemnify any person
made or threatened to be made a party to any proceeding by reason of the former
or present official capacity of such person against judgments, penalties, fines,
including, without limitation, excise taxes assessed against such person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorney's fees and disbursements, incurred by such person in
connection with the proceeding, if, with respect to the acts or omissions of
such person complained of in the proceeding, such person has not been
indemnified by another organization or employee benefit plan for the same
expenses with respect to the same acts or omissions; acted in good faith;
received no improper personal benefit and Section 302A.255, if applicable, has
been satisfied; in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and in the case of acts or omissions by
persons in their official capacity for the corporation, reasonably believed that
the conduct was in the best interests of the corporation, or in the case of acts
or omissions by persons in their capacity for other organizations, reasonably
believed that the conduct was not opposed to the best interests of the
corporation. Subdivision 4 of Section 302A.521 of the Minnesota Statutes
provides that a company's articles of incorporation or bylaws may prohibit such
indemnification or place limits upon the same. The Company's articles and bylaws
do not include any such prohibition or limitation. As a result, the Company is
bound by the indemnification provisions set forth in Section 302A.521 of the
Minnesota Statutes.
As permitted by Section 302A.251 of the Minnesota Statutes, the Articles of
Incorporation of the Company provide that a director shall have no personal
liability to the Company and its shareholders for breach of his fiduciary duty
as a director, to the fullest extent permitted by law. The Agency Agreement
contains provisions under which the Company, on the one hand, and the Placement
Agent, on the other hand, have agreed to indemnify each other (including
officers and directors of the Company and the Placement Agent, and any person
who may be deemed to control the Company or the Placement Agent) against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
24
<PAGE> 25
ITEM 16. EXHIBITS.
EXHIBIT DESCRIPTION OF DOCUMENT
3.1 Series D Convertible Preferred Certificate of Designation
5 Opinion of Maslon Edelman Borman & Brand, LLP
10.1 Form of Securities Purchase Agreement
10.2 Form of Registration Rights Agreement
10.3 Form of Common Stock Purchase Warrant
23.1 Consent of Kafoury, Armstrong & Co.
23.2 Consent of Maslon Edelman Borman & Brand, LLP (included in
Exhibit 5).
24 Power of Attorney (included on page II-3).
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering; and
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Reno, State
of Nevada, on January 11, 2000.
Innovative Gaming Corporation of America, Registrant
By s/ Edward G. Stevenson
-----------------------------------------------------
Edward G. Stevenson, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Edward G. Stevenson and Barrett V.
Johnson, each of either of them, his or her true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution for him or her
and in his or her name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement and to file the same with all exhibits thereto, and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
s/ Edward G. Stevenson Chairman of the Board, January 11, 2000.
- ---------------------------------- Chief Executive Officer and
Edward G. Stevenson Chief Financial Officer
(Principal Executive Officer)
(Principal Accounting Officer)
s/ Ronald A. Johnson Director January 11, 2000.
- ----------------------------------
Ronald A. Johnson
s/ Leo V. Seevers Director January 11, 2000.
- ----------------------------------
Leo V. Seevers
s/ Ronald R. Zideck Director January 11, 2000.
- ----------------------------------
Ronald R. Zideck
</TABLE>
26
<PAGE> 27
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT PAGE NO.
------- ----------------------- --------
<S> <C> <C>
3.1 Series D Convertible Preferred Certificate of Designation
5 Opinion of Maslon Edelman Borman & Brand, LLP
10.1 Form of Securities Purchase Agreement
10.2 Form of Registration Rights Agreement
10.3 Form of Common Stock Purchase Warrant
23.1 Consent of Kafoury, Armstrong & Co.
23.2 Consent of Maslon Edelman Borman & Brand, LLP (included in Exhibit 5)
24 Power of Attorney (included on page II-3)
</TABLE>
27
<PAGE> 1
CERTIFICATE OF DESIGNATION
OF
SERIES D 6% CONVERTIBLE PREFERRED STOCK
OF
INNOVATIVE GAMING CORPORATION OF AMERICA
--------------------------------------------------
Pursuant to Section 302A.401 of the
Business Corporation Act of the State of Minnesota
--------------------------------------------------
Innovative Gaming Corporation of America, a corporation
organized and existing under the Business Corporation Act of the State of
Minnesota (the "CORPORATION"), hereby certifies that the following resolutions
were adopted by the Board of Directors of the Corporation on October 1, 1999
pursuant to authority of the Board of Directors as required by Section 302A.401,
Subdivision 3 of the Business Corporation Act of the State of Minnesota:
RESOLVED, that pursuant to the authority granted to and vested
in the Board of Directors of this Corporation (the "BOARD OF DIRECTORS" or the
"BOARD") in accordance with the provisions of its Articles of Incorporation, the
Board of Directors hereby authorizes a series of the Corporation's preferred
stock (the "PREFERRED STOCK"), and hereby states the designation and number of
shares, and fixes the relative rights, preferences, privileges, powers and
restrictions thereof as follows:
Series D 6% Convertible Preferred Stock:
ARTICLE 1
DEFINITIONS
The terms defined in this Article whenever used in this
Certificate of Designation have the following respective meanings:
(a) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in
Section 6.1(c).
(b) "AFFILIATE" has the meaning ascribed to such term in Rule
12b-2 under the Securities Exchange Act of 1934, as amended.
(c) "BUSINESS DAY" means a day other than Saturday, Sunday or
any day on which banks located in the State of New York are authorized or
obligated to close.
(d) "CAPITAL SHARES" means the Common Shares and any other
shares of any other class or series of common stock, whether now or hereafter
authorized and however designated, which have the right to participate in the
distribution of earnings and assets (upon dissolution, liquidation or
winding-up) of the Corporation.
<PAGE> 2
(e) "COMMON SHARES" or "COMMON STOCK" means shares of common
stock, par value $0.01 per share, of the Corporation.
(f) "COMMON STOCK ISSUED AT CONVERSION" when used with
reference to the securities issuable upon conversion of the Series D Preferred
Stock, means all Common Shares now or hereafter Outstanding and securities of
any other class or series into which the Series D Preferred Stock hereafter
shall have been changed or substituted, whether now or hereafter created and
however designated.
(g) "CONVERSION DATE" means any day on which all or any
portion of shares of the Series D Preferred Stock is converted in accordance
with the provisions hereof.
(h) "CONVERSION NOTICE" means a written notice of conversion
substantially in the form annexed hereto as Annex I.
(i) "CONVERSION PRICE" means on any date of determination the
applicable price for the conversion of shares of Series D Preferred Stock into
Common Shares on such day as set forth in Section 6.1.
(j) "CONVERSION RATIO" means on any date of determination the
applicable percentage of the Market Price for conversion of shares of Series D
Preferred Stock into Common Shares on such day as set forth in Section 6.1.
(k) "CORPORATION" means Innovative Gaming Corporation of
America, a Minnesota corporation, and any successor or resulting corporation by
way of merger, consolidation, sale or exchange of all or substantially all of
the Corporation's assets, or otherwise.
(l) "CURRENT MARKET PRICE" means on any date of determination
the closing bid price of a Common Share on such day as reported on the Nasdaq;
provided, if such security bid is not listed or admitted to trading on the
Nasdaq, as reported on the principal national security exchange or quotation
system on which such security is quoted or listed or admitted to trading, or, if
not quoted or listed or admitted to trading on any national securities exchange
or quotation system, the closing bid price of such security on the
over-the-counter market on the day in question as reported by Bloomberg LP, or a
similar generally accepted reporting service, as the case may be.
(m) "DEFAULT DIVIDEND RATE" is equal to the Dividend Rate plus
an additional 4% per annum.
(n) "DIVIDEND PERIOD" means the quarterly period commencing on
and including the Issue Date or, if a dividend has previously been paid, the day
after the immediately preceding Dividend Payment Due Date and ending on and
including the immediately subsequent Dividend Payment Due Date.
(o) "DIVIDEND PAYMENT DUE DATE" means March 31, June 30,
September 30 and December 31 of each year.
2
<PAGE> 3
(p) "DIVIDEND RATE" means 6% per annum, computed on the basis
of a 360-day year.
(q) "HOLDER" means The Shaar Fund Ltd., any successor thereto,
or any Person or Persons to whom the Series D Preferred Stock is subsequently
transferred in accordance with the provisions hereof.
(r) "ISSUE DATE" means, as to any share of Series D Preferred
Stock, the date of issuance of such share.
(s) "JUNIOR SECURITIES" means the Common Stock and any other
class or series of capital stock of the Corporation whether now existing or
hereafter created, except for Series B Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock.
(t) "LIQUIDATION PREFERENCE" means, with respect to a share of
the Series D Preferred Stock, an amount equal to the sum of (i) the Stated Value
thereof, plus (ii) an amount equal to 30% of such Stated Value, plus (iii) the
aggregate of all accrued and unpaid dividends on such share of Series D
Preferred Stock until the most recent Dividend Payment Due Date; provided that,
in the event of an actual liquidation, dissolution or winding up of the
Corporation, the amount referred to in clause (iii) above shall be calculated by
including accrued and unpaid dividends to the actual date of such liquidation,
dissolution or winding up, rather than the Dividend Payment Due Date referred to
above.
(u) "MANDATORY CONVERSION DATE" has the meaning set forth in
Section 6.9.
(v) "MARKET DISRUPTION EVENT" means any event that results in
a material suspension or limitation of trading of the Common Shares on Nasdaq.
(w) "MARKET PRICE" per Common Share means the arithmetic mean
of the closing bid prices of the Common Shares as reported on Nasdaq for the
five Trading Days during any Valuation Period; provided, if such security bid is
not listed or admitted to trading on the Nasdaq, as reported on the principal
national security exchange or quotation system on which such security is quoted
or listed or admitted to trading, or, if not quoted or listed or admitted to
trading on any national securities exchange or quotation system, the closing bid
prices of such security on the over-the-counter market as reported by Bloomberg
LP, or a similar generally accepted reporting service, as the case may be, for
five Trading Days during any Valuation Period.
(x) "NASDAQ" means the Nasdaq National Market.
(y) "OPTIONAL REDEMPTION PRICE" has the meaning set forth in
Section 6.5.
(z) "OUTSTANDING" when used with reference to Common Shares or
Capital Shares (collectively, "SHARES"), means, on any date of determination,
all issued and outstanding Shares, and includes all such Shares issuable in
respect of outstanding scrip or any certificates representing fractional
interests in such Shares; provided, however, that any such Shares directly or
indirectly owned or held by or for the account of the Corporation or any
Subsidiary of the Corporation shall not be deemed "OUTSTANDING" for purposes
hereof.
3
<PAGE> 4
(aa) "PERSON" means an individual, a corporation, a
partnership, an association, a limited liability company, an unincorporated
business organization, a trust or other entity or organization, and any
government or political subdivision or any agency or instrumentality thereof.
(bb) "REDEMPTION DATE" has the meaning set forth in Section
6.6.
(cc) "REGISTRATION RIGHTS AGREEMENT" means that certain
Registration Rights Agreement dated a date even herewith between the Corporation
and The Shaar Fund Ltd.
(dd) "SEC" means the United States Securities and Exchange
Commission.
(ee) "SECURITIES ACT" means the Securities Act of 1933, as
amended, and the rules and regulations of the SEC thereunder, all as in effect
at the time.
(ff) "SECURITIES PURCHASE AGREEMENT" means that certain
Securities Purchase Agreement dated a date even herewith between the Corporation
and The Shaar Fund Ltd.
(gg) "SERIES B PREFERRED SHARES" or "SERIES B PREFERRED STOCK"
means the shares of the Series B Convertible Preferred Stock, par value $0.01
per share, of the Corporation.
(hh) "SERIES C PREFERRED SHARES" or "SERIES C PREFERRED STOCK"
means the shares of the Series C Convertible Preferred Stock, par value $0.01
per share, of the Corporation.
(ii) "SERIES D PREFERRED SHARES" or "SERIES D PREFERRED STOCK"
means the shares of Series D 6% Convertible Preferred Stock of the Corporation
or such other convertible Preferred Stock exchanged therefor.
(jj) "STATED VALUE" has the meaning set forth in Article 2.
(kk) "SUBSIDIARY" means any entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are owned
directly or indirectly by the Corporation.
(ll) "TRADING DAY" means any day on which purchases and sales
of securities authorized for quotation on Nasdaq are reported thereon and on
which no Market Disruption Event has occurred.
(mm) "VALUATION EVENT" has the meaning set forth in Section
6.1.
(nn) "VALUATION PERIOD" means the period of five Trading Days
immediately preceding the Conversion Date; provided, however, that if a
Valuation Event occurs during a Valuation Period on a date less than five
Trading Days before the Conversion Date, the Valuation Period shall be extended
until the date five Trading Days after the occurrence of the Valuation Event.
All references to "CASH" or "$" herein means currency of the
United States of America.
4
<PAGE> 5
ARTICLE 2
DESIGNATION AND AMOUNT
The designation of this series, which consists of 3,000 shares
of Preferred Stock, is Series D 6% Convertible Preferred Stock (the "SERIES D
PREFERRED STOCK"), with a par value of $0.01 per share, and the stated value
shall be $1,000 per share (the "STATED VALUE").
ARTICLE 3
RANK
The Series D Preferred Stock shall rank (i) junior to the
Series B Preferred Stock and Series C Preferred Stock and (ii) prior to the
Junior Securities.
ARTICLE 4
DIVIDENDS
(a) (i) The Holder shall be entitled to receive, when, as and
if declared by the Board of Directors, out of funds legally available for
the payment of dividends, dividends at the Dividend Rate on the Stated
Value of each share of Series D Preferred Stock on and as of each Dividend
Payment Due Date with respect to each Dividend Period; provided, however,
that if any dividend is not paid in full on any Dividend Payment Due Date,
dividends shall thereafter accrue and be payable at the Default Dividend
Rate on the Stated Value of each share of Series D Preferred Stock until
all accrued dividends are paid in full. Dividends on the Series D Preferred
Stock shall be cumulative from the date of issue, whether or not declared
for any reason, including if such declaration is prohibited under any
outstanding indebtedness or borrowings of the Corporation or any of its
Subsidiaries, or any other contractual provision binding on the Corporation
or any of its Subsidiaries, and whether or not there shall be funds legally
available for the payment thereof.
(ii) Each dividend shall be payable in equal quarterly
amounts on each Dividend Payment Due Date, commencing December 31, 1999, to
the Holders of record of shares of the Series D Preferred Stock, as they
appear on the stock records of the Corporation at the close of business on
such record date, not more than 60 days or less than 10 days preceding the
payment dates thereof, as shall be fixed by the Board of Directors. Accrued
and unpaid dividends for any past Dividend Period may be declared and paid
at any time, without reference to any Dividend Payment Due Date, to Holders
of record on such date, not more than 15 days preceding the payment date
thereof, as may be fixed by the Board of Directors.
(iii) At the option of the Corporation, the dividend
shall be paid either (x) in cash or (y) through the issuance of duly and
validly authorized and issued, fully paid and nonassessable, freely
tradable shares of the Common Stock valued at the Market Price; provided,
however, that if no funds are legally available for the payment of cash
dividends on the Series D Preferred Stock, dividends shall be paid as
provided in clause (y) above. The Common Stock to be issued in lieu of cash
payments shall be registered for resale in the Registration Statement (as
defined in the Registration Rights
5
<PAGE> 6
Agreement). Notwithstanding the foregoing, until such Registration
Statement has been declared effective under the Securities Act by the SEC,
payment of dividends on the Series D Preferred Stock shall be in cash.
(b) Except as provided in Section 4(e) hereof, the Holder
shall not be entitled to any dividends in excess of the cumulative dividends, as
herein provided, on the Series D Preferred Stock.
(c) So long as any shares of the Series B Preferred Stock or
the Series C Preferred Stock are outstanding, no dividends shall be declared or
paid or set apart for payment on the Series D Preferred Stock for any period
unless full cumulative dividends required to be paid in have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment on the Series B Preferred Stock or
the Series C Preferred Stock for all Dividend Periods terminating on or prior to
the date of payment of the dividend on such class or series of Series D
Preferred Stock.
(d) So long as any shares of the Series D Preferred Stock are
outstanding, no dividends shall be declared or paid or set apart for payment or
other distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan (including a stock option
plan) of the Corporation or any subsidiary), (all such dividends, distributions,
redemptions or purchases being hereinafter referred to as a "JUNIOR SECURITIES
DISTRIBUTION") for any consideration (or any moneys be paid to or made available
for a sinking fund for the redemption of any shares of any such stock) by the
Corporation, directly or indirectly, unless in each case (i) the full cumulative
dividends required to be paid in cash on all outstanding shares of the Series B
Preferred Stock, the Series C Preferred Stock and Series D Preferred Stock shall
have been paid or set apart for payment for all past Dividend Periods with
respect to the Series D Preferred Stock and all past dividend periods with
respect to the Series B Preferred Stock and the Series C Preferred Stock, and
(ii) sufficient funds shall have been paid or set apart for the payment of the
dividend for the current Dividend Period with respect to the Series D Preferred
Stock and the current dividend period with respect to the Series B Preferred
Stock and the Series C Preferred Stock.
(e) If the Corporation shall at any time or from time to time
after the Issue Date declare, order, pay or make a dividend or other
distribution (including, without limitation, any distribution of stock or other
securities or property or rights or warrants to subscribe for securities of the
Corporation or any of its Subsidiaries by way of dividend or spin-off) on shares
of its Common Stock, then, and in each such case, in addition to the dividend
obligation of the Corporation specified in paragraph (a) of this Article 4, the
Corporation shall declare, order, pay and make the same dividend or distribution
to each Holder of Series D Preferred Stock as would have been made with respect
to the number of Common Shares the Holder would have received had it converted
all of its Series D Preferred Shares, and exercised the Warrant held by it in
full for all the Common Shares then underlying the Warrant, immediately prior to
such dividend or distribution.
6
<PAGE> 7
ARTICLE 5
LIQUIDATION PREFERENCE; MERGERS, CONSOLIDATIONS, ETC.
(a) If the Corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or state bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or state bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of 30 consecutive days and, on account of any such event, the Corporation
shall liquidate, dissolve or wind up, or if the Corporation shall otherwise
liquidate, dissolve or wind up (each such event being considered a "LIQUIDATION
EVENT"), no distribution shall be made to the holders of any shares of capital
stock of the Corporation except the Series B Preferred Stock and the Series C
Preferred Stock upon liquidation, dissolution or winding-up unless prior
thereto, the holders of shares of Series D Preferred Stock, subject to this
Article 5, shall have received the Liquidation Preference with respect to each
share. If upon the occurrence of a Liquidation Event, the assets and funds
available for distribution among the Holders of the Series D Preferred Stock
shall be insufficient to permit the payment to such Holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series D Preferred Stock shall be
distributed ratably among such shares in proportion to the ratio that the
Liquidation Preference payable on each such share bears to the aggregate
Liquidation Preference payable on all such shares.
(b) In case the Corporation shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another Person
(where the Corporation is not the survivor or where there is a change in or
distribution with respect to the Common Stock of the Corporation), sell, convey,
transfer or otherwise dispose of all or substantially all its property, assets
or business to another Person, or effectuate a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
disposed of (each, a "FUNDAMENTAL CORPORATE CHANGE") and, pursuant to the terms
of such Fundamental Corporate Change, shares of common stock of the successor or
acquiring corporation, or any cash, shares of stock or other securities or
property of any nature whatsoever (including warrants or other subscription or
purchase rights) in addition to or in lieu of common stock of the successor or
acquiring corporation ("OTHER PROPERTY"), are to be received by or distributed
to the holders of Common Stock of the Company, then each Holder of Series D
Preferred Stock shall have the right thereafter, at its sole option, either (x)
to require the Corporation to deem such Fundamental Corporate Change to be a
liquidation, dissolution or winding up of the Corporation pursuant to which the
Corporation shall be required to distribute, upon consummation of and as a
condition to, such Fundamental Corporate Change an amount equal to 120% of the
Liquidation Preference with respect to each outstanding share of Series D
Preferred Stock, (y) to receive the number of shares of common stock of the
successor or acquiring corporation or of the Corporation, if it is
7
<PAGE> 8
the surviving corporation, and Other Property as is receivable upon or as a
result of such Fundamental Corporate Change by a holder of the number of shares
of Common Stock into which such Series D Preferred Stock may be converted at the
Conversion Price applicable immediately prior to such Fundamental Corporate
Change or (z) require the Corporation, or such successor, resulting or
purchasing corporation, as the case may be, to, without benefit of any
additional consideration therefor, to execute and deliver to the Holder shares
of its Preferred Stock with substantial identical rights, preferences,
privileges, powers, restrictions and other terms as the Series D Preferred Stock
equal to the number of shares of Series D Preferred Stock held by such Holder
immediately prior to such Fundamental Corporate Change; provided, that all
Holders of Series D Preferred Stock shall be deemed to elect the option set
forth in clause (i) above if at least 90% in interest of such Holders elect such
option. The foregoing provisions of this Section 5(b) shall similarly apply to
successive Fundamental Corporate Changes.
ARTICLE 6
CONVERSION OF PREFERRED STOCK
SECTION 6.1 CONVERSION; CONVERSION PRICE
At the option of the Holder, the shares of Preferred Stock may be
converted, either in whole or in part, into Common Shares (calculated as to each
such conversion to the nearest 1/100th of a share) at any time and from time to
time following the Issue Date, at a Conversion Price per share of Common Stock
equal to the lesser of (a) 3.00 or (b) 75% of the Market Price. At the
Corporation's option, the amount of accrued and unpaid dividends as of the
Conversion Date shall not be subject to conversion but instead may be paid in
cash as of the Conversion Date; if the Corporation elects to convert the amount
of accrued and unpaid dividends at the Conversion Date into Common Stock, the
Common Stock issued to the Holder shall be valued at the applicable Conversion
Price.
The number of shares of Common Stock due upon conversion of Series
D Preferred Stock shall be (i) the number of shares of Series D Preferred Stock
to be converted, plus accrued and unpaid dividends, to the extent the
Corporation does not elect to pay, and pay, accrued and unpaid dividends in
cash, multiplied by (ii) the Stated Value and divided by (iii) the applicable
Conversion Price.
Within two Business Days of the occurrence of a Valuation Event,
the Corporation shall send notice thereof to each Holder. Notwithstanding
anything to the contrary contained herein, if a Valuation Event occurs during
any Valuation Period, the Holder may convert some or all of its Series D
Preferred Stock, at its sole option, at a Conversion Price equal to the Current
Market Price on any Trading Day during the Valuation Period.
For purposes of this Section 6.1, a "VALUATION EVENT" shall mean an
event in which the Corporation takes any of the following actions:
(a) subdivides or combines its Capital Shares;
(b) makes any distribution on its Capital Shares;
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(c) issues any additional Capital Shares (the "ADDITIONAL CAPITAL
SHARES"), otherwise than as provided in the foregoing Sections 6.1(a) and 6.1(b)
above, at a price per share less, or for other consideration lower, than the
Current Market Price in effect immediately prior to such issuances, or without
consideration, except for issuances under employee benefit plans consistent with
those presently in effect and issuances under presently outstanding warrants,
options or convertible securities;
(d) issues any warrants, options or other rights to subscribe for
or purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Current Market
Price in effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable or
exercisable for Additional Capital Shares and the consideration per share for
which Additional Capital Shares may at any time thereafter be issuable pursuant
to the terms of such convertible, exchangeable or exercisable securities shall
be less than the Current Market Price in effect immediately prior to such
issuance;
(f) announces or effects a Fundamental Corporate Change;
(g) makes a distribution of its assets or evidences of indebtedness
to the holders of its Capital Shares as a dividend in liquidation or by way of
return of capital or other than as a dividend payable out of earnings or surplus
legally available for the payment of dividends under applicable law or any
distribution to such holders made in respect of the sale of all or substantially
all of the Corporation's assets (other than under the circumstances provided for
in the foregoing Sections 6.1(a) through 6.1(f)); or
(h) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing Sections 6.1(a)
through 6.1(g) hereof, which in the opinion of the Holder, determined in good
faith, would have a material adverse effect upon the rights of the Holder at the
time of a conversion of the Preferred Stock or is reasonably likely to result in
a decrease in the Market Price.
SECTION 6.2 EXERCISE OF CONVERSION PRIVILEGE
(a) Conversion of the Series D Preferred Stock may be exercised, in
whole or in part, by the Holder by telecopying an executed and completed
Conversion Notice to the Corporation. Each date on which a Conversion Notice is
telecopied to the Corporation in accordance with the provisions of this Section
6.2 shall constitute a Conversion Date. The Corporation shall convert the
Preferred Stock and issue the Common Stock Issued at Conversion, and all voting
and other rights associated with the beneficial ownership of the Common Stock
Issued at Conversion shall vest with the Holder, effective as of the Conversion
Date at the time specified in the Conversion Notice. The Conversion Notice also
shall state the name or names (with addresses) of the Persons who are to become
the holders of the Common Stock Issued at Conversion in connection with such
conversion. The Holder shall deliver the shares of Series D Preferred Stock to
the Corporation by express courier within 15 days following the date on which
the telecopied Conversion Notice has been transmitted to the Corporation. Upon
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surrender for conversion, the Preferred Stock shall be accompanied by a proper
assignment thereof to the Corporation or be endorsed in blank. As promptly as
practicable after the receipt of the Conversion Notice as aforesaid, but in any
event not more than five Business Days after the Corporation's receipt of such
Conversion Notice, the Corporation shall (i) issue the Common Stock issued at
Conversion in accordance with the provisions of this Article 6, and (ii) cause
to be mailed for delivery by overnight courier to the Holder (x) a certificate
or certificate(s) representing the number of Common Shares to which the Holder
is entitled by virtue of such conversion, (y) cash, as provided in Section 6.3,
in respect of any fraction of a Common Share issuable upon such conversion and
(z) if the Corporation chooses to pay accrued and unpaid dividends in cash, cash
in the amount of accrued and unpaid dividends as of the Conversion Date. Such
conversion shall be deemed to have been effected at the time at which the
Conversion Notice indicates so long as the Series D Preferred Stock shall have
been surrendered as aforesaid at such time, and at such time the rights of the
Holder of the Series D Preferred Stock, as such, shall cease and the Person or
Persons in whose name or names the Common Stock Issued at Conversion shall be
issuable shall be deemed to have become the holder or holders of record of the
Common Shares represented thereby and all voting and other rights associated
with the beneficial ownership of such Common Shares shall at such time vest with
such Person or Persons. The Conversion Notice shall constitute a contract
between the Holder and the Corporation, whereby the Holder shall be deemed to
subscribe for the number of Common Shares which it will be entitled to receive
upon such conversion and, in payment and satisfaction of such subscription (and
for any cash adjustment to which it is entitled pursuant to Section 6.4), to
surrender the Series D Preferred Stock and to release the Corporation from all
liability thereon. No cash payment aggregating less than $1.00 shall be required
to be given unless specifically requested by the Holder.
(b) If, at any time (i) the Corporation challenges, disputes or
denies the right of the Holder hereof to effect the conversion of the Series D
Preferred Stock into Common Shares or otherwise dishonors or rejects any
Conversion Notice delivered in accordance with this Section 6.2 or (ii) any
third party who is not and has never been an Affiliate of the Holder commences
any lawsuit or proceeding or otherwise asserts any claim before any court or
public or governmental authority which seeks to challenge, deny, enjoin, limit,
modify, delay or dispute the right of the Holder hereof to effect the conversion
of the Series D Preferred Stock into Common Shares, then the Holder shall have
the right, by written notice to the Corporation, to require the Corporation to
promptly redeem the Series D Preferred Stock for cash at a redemption price
equal to 135% of the Stated Value thereof together with all accrued and unpaid
dividends thereon (the "MANDATORY PURCHASE AMOUNT"). Under any of the
circumstances set forth above, the Corporation shall be responsible for the
payment of all costs and expenses of the Holder, including reasonable legal fees
and expenses, as and when incurred in disputing any such action or pursuing its
rights hereunder (in addition to any other rights of the Holder).
(c) The Holder shall be entitled to exercise its conversion
privilege notwithstanding the commencement of any case under 11 U.S.C. ss. 101
et seq. (the "BANKRUPTCY CODE"). In the event the Corporation is a debtor under
the Bankruptcy Code, the Corporation hereby waives to the fullest extent
permitted any rights to relief it may have under 11 U.S.C. ss. 362 in respect of
the Holder's conversion privilege. The Corporation hereby waives to thE fullest
extent permitted any rights to relief it may have under 11 U.S.C. ss. 362 in
respect of the conversion of the Series D Preferred Stock. The Corporation
agrees, without cost or expense to
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the Holder, to take or consent to any and all action necessary to effectuate
relief under 11 U.S.C. ss. 362.
SECTION 6.3 FRACTIONAL SHARES
No fractional Common Shares or scrip representing fractional Common
Shares shall be issued upon conversion of the Series D Preferred Stock. Instead
of any fractional Common Shares which otherwise would be issuable upon
conversion of the Series D Preferred Stock, the Corporation shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction.
SECTION 6.4 ADJUSTMENTS TO CONVERSION RATIO
For so long as any shares of the Series D Preferred Stock are
outstanding, if the Corporation issues and sells pursuant to an exemption from
registration under the Securities Act (A) Common Shares at a purchase price on
the date of issuance thereof that is lower than the Conversion Price, (B)
warrants or options with an exercise price on the date of issuance thereof that
is lower than the Conversion Price for the Holder on such date, except for
employee stock option agreements or stock incentive agreements of the
Corporation, or (C) convertible, exchangeable or exercisable securities with a
right to exchange at lower than the Current Market Price on the date of issuance
or conversion, as applicable, of such convertible, exchangeable or exercisable
securities, except for stock option agreements or stock incentive agreements,
then the Conversion Ratio shall be reduced to equal the lowest of any such lower
rates.
SECTION 6.5 OPTIONAL REDEMPTION
At any time after the date of issuance of the Series D Preferred
Stock until the Mandatory Conversion Date (as defined below), the Corporation,
upon notice delivered to the Holder as provided in Section 6.6, may redeem, in
cash, the Series D Preferred Stock, in whole or in part (but only with respect
to such shares as to which the Holder has not theretofore furnished a Conversion
Notice in compliance with Section 6.2), at 135% of the Stated Value thereof (the
"OPTIONAL REDEMPTION PRICE"), together with all accrued and unpaid dividends
thereon to the date of redemption (the "REDEMPTION DATE"); provided, however,
that the Corporation may only redeem the Series D Preferred Stock under this
Section 6.5 if the Current Market Price is less than the Current Market Price on
the Issue Date. Except as set forth in this Section 6.5, the Corporation shall
not have the right to redeem the Series D Preferred Stock.
SECTION 6.6 NOTICE OF REDEMPTION
Notice of redemption pursuant to Section 6.5 shall be provided by
the Corporation to the Holder in writing (by registered mail or overnight
courier at the Holder's last address appearing in the Corporation's security
registry) not less than 10 nor more than 15 days prior to the Redemption Date,
which notice shall specify the Redemption Date and refer to Section 6.5
(including a statement of the Current Market Price per Common Share) and this
Section 6.6.
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SECTION 6.7 SURRENDER OF PREFERRED STOCK
Upon any redemption of the Series D Preferred Stock pursuant to
Sections 6.5 and 6.6, the Holder shall either deliver the Series D Preferred
Stock by hand to the Corporation at its principal executive offices or surrender
the same to the Corporation at such address by express courier within 14 days
after the date that the Buyer receives payment therefore. Payment of the
Optional Redemption Price shall be made by the Corporation to the Holder by wire
transfer of immediately available funds to such account(s) as the Holder shall
specify to the Corporation. If payment of such Optional Redemption Price is not
made in full by the Redemption Date, the Holder shall again have the right to
convert the Series D Preferred Stock as provided in Article 6 hereof.
SECTION 6.8 MANDATORY CONVERSION
On the fifth anniversary of the date of this Agreement (the
"MANDATORY CONVERSION DATE"), the Corporation shall convert all Series D
Preferred Stock outstanding, at the Conversion Price utilizing the Stated Value
(plus accrued and unpaid dividends) as the value of each share of Series D
Preferred Stock, into Common Stock which is registered for resale in open market
transactions on the Registration Statement (as defined in the Registration
Rights Agreement), which Registration Statement shall then be effective under
the Securities Act.
SECTION 6.9 CERTAIN CONVERSION LIMITATIONS
(a) Notwithstanding anything herein to the contrary, the Holder
shall not have the right, and the Corporation shall not have the obligation, to
convert all or any portion of the Series D Preferred Stock (and the Corporation
shall not have the right to pay dividends on the Series D Preferred Stock in
shares of Common Stock) if and to the extent that the issuance to the Holder of
shares of Common Stock upon such conversion (or payment of dividends) would
result in the Holder being deemed the "beneficial owner" of more than 5% of the
then Outstanding shares of Common Stock within the meaning of Section 13(d) of
the Securities Exchange Act of 1934, as amended, and the rules promulgated
thereunder. If any court of competent jurisdiction shall determine that the
foregoing limitation is ineffective to prevent a Holder from being deemed the
beneficial owner of more than 5% of the then Outstanding shares of Common Stock,
then the Corporation shall redeem so many of such Holder's shares (the
"REDEMPTION SHARES") of Series D Preferred Stock as are necessary to cause such
Holder to be deemed the beneficial owner of not more than 5% of the then
Outstanding shares of Common Stock. Upon such determination by a court of
competent jurisdiction, the Redemption Shares shall immediately and without
further action be deemed returned to the status of authorized but unissued
shares of Series D Preferred Stock, and the Holder shall have no interest in or
rights under such Redemption Shares. Any and all dividends paid on or prior to
the date of such determination shall be deemed dividends paid on the remaining
shares of Series D Preferred Stock held by the Holder. Such redemption shall be
for cash at a redemption price equal to the sum of (i) 125% of the Stated Value
of the Redemption Shares and (ii) any accrued and unpaid dividends to the date
of such redemption.
(b) Unless the Corporation shall have obtained the approval of its
voting stockholders to such issuance in accordance with the rules of Nasdaq or
such other stock market
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with which the Corporation shall be required to comply, but only to the extent
required thereby, the Corporation shall not issue shares of Common Stock (i)
upon conversion of any shares of Series D Preferred Stock or (ii) as a dividend
on the Series D Preferred Stock, if such issuance of Common Stock, when added to
the number of shares of Common Stock previously issued by the Corporation (i)
upon conversion of shares of the Series D Preferred Stock, (ii) upon exercise of
the Warrants issued pursuant to the terms of the Securities Purchase Agreement
and (iii) in payment of dividends on the Series D Preferred Stock, would equal
or exceed 20% of the number of shares of the Corporation's Common Stock which
were issued and Outstanding on the Issue Date (the "MAXIMUM ISSUANCE AMOUNT").
In the event that a properly executed Conversion Notice is received by the
Corporation which would require the Corporation to issue shares of Common Stock
equal to or in excess of the Maximum Issuance Amount, the Corporation shall
honor such conversion request by (i) converting the number of shares of Series D
Preferred Stock stated in the Conversion Notice not in excess of the Maximum
Issuance Amount and (ii) redeeming the number of shares of Series D Preferred
Stock stated in the Conversion Notice equal to or in excess of the Maximum
Issuance Amount in cash at a price equal to 125% of the Stated Value of the
shares of Series D Preferred Stock to be so redeemed, together with all accrued
and unpaid dividends thereon. In the event that the Corporation shall elect to
pay a dividend in shares of Common Stock which would require the Corporation to
issue shares of Common Stock equal to or in excess of the Maximum Issuance
Amount, the Corporation shall pay (i) a dividend in shares of Common Stock equal
to one less than an amount which would result in the Corporation issuing shares
equal to the Maximum Issuance Amount and (ii) the balance of the dividend in
cash.
ARTICLE 7
VOTING RIGHTS
The Holders of the Series D Preferred Stock have no voting power,
except as otherwise provided by the Business Corporation Act of the State of
Minnesota ("MBCA"), in this Article 7, and in Article 8 below.
Notwithstanding the above, the Corporation shall provide each
Holder of Series D Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
Holder, at least 30 days prior to the consummation of the transaction or event,
whichever is earlier), of the date on which any such action is to be taken for
the purpose of such dividend, distribution, right or other event, and a brief
statement regarding, the amount and character of such dividend, distribution,
right or other event to the extent known at such time.
To the extent that under the MBCA the vote of the Holders of the
Series D Preferred Stock, voting separately as a class or series applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the Holders of at least 90% of the
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outstanding shares of Series D Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of at least 90% of
the outstanding shares of Series D Preferred Stock (except as otherwise may be
required under the MBCA) shall constitute the approval of such action by the
class. To the extent that under the MBCA holders of the Series D Preferred Stock
are entitled to vote on a matter with holders of Common Stock, voting together
as one class, each share of Series D Preferred Stock shall be entitled to a
number of votes equal to the number of shares of Common Stock into which it is
then convertible using the record date for the taking of such vote of
shareholders as the date as of which the Conversion Price is calculated. Holders
of the Series D Preferred Stock shall be entitled to notice of all shareholder
meetings or written consents (and copies of proxy materials and other
information sent to shareholders) with respect to which they would be entitled
to vote, which notice would be provided pursuant to the Corporation's bylaws and
the MBCA.
ARTICLE 8
PROTECTIVE PROVISIONS
So long as shares of Series D Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the MBCA) of the Holders of at least 90% of the then
outstanding shares of Series D Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series D Preferred Stock;
(b) create any new class or series of capital stock having a
preference over the Series D Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation ("SENIOR SECURITIES")
or alter or change the rights, preferences or privileges of any Senior
Securities so as to affect adversely the Series D Preferred Stock;
(c) increase the authorized number of shares of Series D Preferred
Stock; or
(d) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the Holders of
shares of the Series D Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).
In the event Holders of least 90% of the then outstanding shares of
Series D Preferred Stock agree to allow the Corporation to alter or change the
rights, preferences or privileges of the shares of Series Preferred Stock,
pursuant to subsection (a) above, so as to affect the Series D Preferred Stock,
then the Corporation will deliver notice of such approved change to the Holders
of the Series Preferred Stock that did not agree to such alteration or change
(the "DISSENTING HOLDERS") and Dissenting Holders shall have the right for a
period of 30 days to convert pursuant to the terms of this Certificate of
Designation as in effect prior to such alteration or change or continue to hold
their shares of Series D Preferred Stock.
Notwithstanding anything to the contrary contained herein, if at
any time the Corporation shall "spin-off" certain of its assets or businesses by
transferring, directly or
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indirectly, such assets or businesses to a subsidiary of the Corporation
("SPINCO") and making a dividend (the "SPIN-OFF DIVIDEND") to the Corporation's
stockholders of the shares of capital stock of Spinco, then prior to making the
Spin-off Dividend, the Corporation shall cause Spinco to issue to each Holder
that number of shares of preferred stock of Spinco with substantially identical
rights, preferences, privileges, powers, restrictions and other terms as the
Series D Preferred Stock equal to the number of shares of Series D Preferred
Shares held by such Holder immediately prior to the Spin-off Dividend.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 LOSS, THEFT, DESTRUCTION OF PREFERRED STOCK
Upon receipt of evidence satisfactory to the Corporation of the
loss, theft, destruction or mutilation of shares of Series D Preferred Stock
and, in the case of any such loss, theft or destruction, upon receipt of
indemnity or security reasonably satisfactory to the Corporation, or, in the
case of any such mutilation, upon surrender and cancellation of the Series D
Preferred Stock, the Corporation shall make, issue and deliver, in lieu of such
lost, stolen, destroyed or mutilated shares of Series D Preferred Stock, new
shares of Series D Preferred Stock of like tenor. The Series D Preferred Stock
shall be held and owned upon the express condition that the provisions of this
Section 9.1 are exclusive with respect to the replacement of mutilated,
destroyed, lost or stolen shares of Series D Preferred Stock and shall preclude
any and all other rights and remedies notwithstanding any law or statute
existing or hereafter enacted to the contrary with respect to the replacement of
negotiable instruments or other securities without the surrender thereof.
SECTION 9.2 WHO DEEMED ABSOLUTE OWNER
The Corporation may deem the Person in whose name the Series D
Preferred Stock shall be registered upon the registry books of the Corporation
to be, and may treat it as, the absolute owner of the Series D Preferred Stock
for the purpose of receiving payment of dividends on the Series D Preferred
Stock, for the conversion of the Series D Preferred Stock and for all other
purposes, and the Corporation shall not be affected by any notice to the
contrary. All such payments and such conversion shall be valid and effectual to
satisfy and discharge the liability upon the Series D Preferred Stock to the
extent of the sum or sums so paid or the conversion so made.
SECTION 9.3 NOTICE OF CERTAIN EVENTS
In the case of the occurrence of any event described in Section
5(b), 6.5 or 6.6 of this Certificate of Designation, the Corporation shall cause
to be mailed to the Holder of the Series D Preferred Stock at its last address
as it appears in the Corporation's security registry, at least 20 days prior to
the applicable record, effective or expiration date hereinafter specified (or,
if such 20 days notice is not possible, at the earliest possible date prior to
any such record, effective or expiration date), a notice stating (x) the date on
which a record is to be taken for the purpose of such corporate action, or if a
record is not to be taken, the date as of which the Holders of record of Series
D Preferred Stock to be entitled to such dividend, distribution,
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issuance or granting of rights, options or warrants are to be determination or
the date on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up is expected to become effective, and (y)
the date as of which it is expected that Holders of record of Series D Preferred
Stock will be entitled to exchange their shares for securities, cash or other
property deliverable upon such reclassification, consolidation, merger, sale
transfer, dissolution, liquidation or winding-up.
SECTION 9.4 REGISTER
The Corporation shall keep at its principal office a register in
which the Corporation shall provide for the registration of the Series D
Preferred Stock. Upon any transfer of the Series D Preferred Stock in accordance
with the provisions hereof, the Corporation shall register such transfer on the
Series D Preferred Stock register.
SECTION 9.5 WITHHOLDING
To the extent required by applicable law, the Corporation may
withhold amounts for or on account of any taxes imposed or levied by or on
behalf of any taxing authority in the United States having jurisdiction over the
Corporation from any payments made pursuant to the Series D Preferred Stock.
SECTION 9.6 HEADINGS
The headings of the Articles and Sections of this Certificate of
Designation are inserted for convenience only and do not constitute a part of
this Certificate of Designation.
SECTION 9.7 SEVERABILITY
If any provision of this Certificate of Designation, or the
application thereof to any person or entity or any circumstance, is invalid or
unenforceable, (i) a suitable and equitable provision shall be substituted
therefor in order to carry out, so far as may be valid and enforceable, the
intent and purpose of such invalid or unenforceable provision, and (ii) the
remainder of this Certificate of Designation and the application of such
provision to other persons, entities or circumstances shall not be affected by
such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of such provision, or the
application thereof, in any other jurisdiction.
[SIGNATURE PAGE FOLLOWS.]
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by its duly authorized officers on October 8, 1999.
INNOVATIVE GAMING CORPORATION OF AMERICA
By: s/ Edward G. Stevenson
--------------------------------------------
Name: Edward G. Stevenson
Title: Chief Executive Officer
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ANNEX I
FORM OF CONVERSION NOTICE
TO: Innovative Gaming Corporation of America
4801 West 81st Street, Suite 112
Bloomington, MN 55437
The undersigned owner of this Series D 6% Convertible Preferred
Stock (the "SERIES D PREFERRED STOCK") issued by Innovative Gaming Corporation
of America (the "CORPORATION") hereby irrevocably exercises its option to
convert shares of the Series D Preferred Stock into shares of the common
stock, par value $0.01 per share ("COMMON STOCK"), of the Corporation in
accordance with the terms of the Certificate of Designation. The undersigned
hereby instructs the Corporation to convert the number of shares of the Series D
Preferred Stock specified above into Shares of Common Stock Issued at Conversion
in accordance with the provisions of Article 6 of the Certificate of
Designation. The undersigned directs that the Common Stock issuable and
certificates therefor deliverable upon conversion, the Series D Preferred Stock
recertificated, if any, not being surrendered for conversion hereby, together
with any check in payment for fractional Common Stock, be issued in the name of
and delivered to the undersigned unless a different name has been indicated
below. All capitalized terms used and not defined herein have the respective
meanings assigned to them in the Certificate of Designation. So long as the
Series D Preferred Stock shall have been surrendered for conversion hereby, the
conversion pursuant hereto shall be deemed to have been effected at the date and
time specified below, and at such time the rights of the undersigned as a Holder
of the Series D Preferred Stock shall cease and the Person or Persons in whose
name or names the Common Stock Issued at Conversion shall be issuable shall be
deemed to have become the holder or holders of record of the Common Shares
represented thereby and all voting and other rights associated with the
beneficial ownership of such Common Shares shall at such time vest with such
Person or Persons.
Date and time:
---------------------
--------------------------------------
Signature
Fill in for registration of Series D Preferred Stock:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please print name and address (including zip code number)
STATE OF MINNESOTA
FILED - DUPLICATE COPY
October 8, 1999
S/ Mary Kiffmeyer
Secretary of State
<PAGE> 1
EXHIBIT 5
January 13, 2000.
Innovative Gaming Corporation of America
4725 Aircenter Circle
Reno, NV 89502
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted on behalf of Innovative Gaming Corporation of America (the
"Company") in connection with a Registration Statement on Form S-3 (the
"Registration Statement") to be filed by the Company with the Securities and
Exchange Commission on January 13, 2000 relating to the registration under the
Securities Act of 1933, as amended, of a maximum of 1,750,000 shares of common
stock, par value $.01 per share (the "Common Stock"), issuable by the Company
upon conversion of the Series D 6% Convertible Preferred Stock and payments of
dividends thereunder and a maximum of 355,000 shares of Common Stock, issuable
by the Company upon exercise of certain warrants to purchase shares of Common
Stock.
Upon examination of such corporate documents and records as we have deemed
necessary or advisable for the purposes hereof and including and in reliance
upon certain certificates by the Company, it is our opinion that:
1. The Company is a validly existing corporation in good standing
under the laws of the State of Minnesota.
2. The Common Stock has been duly authorized and, when issued as
described in the registration statement, will be legally issued,
fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
Maslon Edelman Borman & Brand, LLP
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SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of October 13,
1999, between Innovative Gaming Corporation of America, a Minnesota corporation
with principal executive offices located at 4725 Aircenter Circle, Reno, Nevada
89502 (the "COMPANY"), and The Shaar Fund Ltd. ("BUYER").
WHEREAS, Buyer desires to purchase from the Company, and the
Company desires to issue and sell to Buyer, upon the terms and subject to the
conditions of this Agreement, (i) 500 shares of the Company's Series D 6%
Convertible Preferred Stock, par value $0.01 per share (collectively, the
"PREFERRED SHARES"), and (ii) Common Stock Purchase Warrants in the form
attached hereto as Exhibit A (collectively, the "WARRANTS");
WHEREAS, upon the terms and subject to the designations,
preferences and rights set forth in the Company's Certificate of Designation of
Series D 6% Convertible Preferred Stock in the form attached hereto as Exhibit B
(the "CERTIFICATE OF DESIGNATION"), the Preferred Shares are convertible into
shares of the Company's common stock, par value $0.01 per share (the "COMMON
STOCK");
WHEREAS, the Warrants, upon the terms and subject to the
conditions in the Warrants, will be exercisable for a period of five years;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein, the parties hereto, intending to be legally
bound, hereby agree as follows:
I. PURCHASE AND SALE OF PREFERRED SHARES AND WARRANTS
A. TRANSACTION. Buyer hereby agrees to purchase from the
Company, and the Company has offered and hereby agrees to issue and sell to
Buyer in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"),
the Preferred Shares and the Warrants to purchase 50,000 shares of Common Stock.
B. PURCHASE PRICE; FORM OF PAYMENT. The purchase price
for the Preferred Shares and the Warrants to be purchased by Buyer hereunder
shall be $500,000 (the "PURCHASE PRICE"). Buyer shall pay the Purchase Price by
wire transfer of immediately available funds to the escrow agent (the "ESCROW
AGENT") identified in those certain Escrow Instructions of even date herewith, a
copy of which is attached hereto as Exhibit C (the "ESCROW INSTRUCTIONS").
Simultaneously with the execution of this Agreement, the Company shall deliver
one or more duly authorized, issued and executed certificates (I/N/O Buyer or,
if the Company otherwise has been notified, I/N/O Buyer's nominee) evidencing
the Preferred Shares and the Warrants which Buyer is purchasing, to the Escrow
Agent or its designated depository. By executing and delivering this Agreement,
Buyer and the Company each hereby agrees to observe the terms and
<PAGE> 2
conditions of the Escrow Instructions, all of which are incorporated herein by
reference as if fully set forth herein.
C. METHOD OF PAYMENT. Payment into escrow of the Purchase
Price shall be made by wire transfer of immediately available funds to:
The Bank of New York
48 Wall Street
New York, NY 10038
ABA No.: 021000018
For the Account of: Cadwalader, Wickersham & Taft
Trust Account IOLA Fund
Account No.: 0902061070
D. APPROVAL. Buyer shall be given notice prior to any
purchase and sale of any shares of the Company's Series D 6% Convertible
Preferred Stock, notice of the names and addresses of the purchasers of any
shares of the Company's Series D 6% Convertible Preferred Stock.
II. BUYER'S REPRESENTATIONS AND WARRANTIES
Buyer represents and warrants to and covenants and agrees with
the Company as follows:
A. Buyer is purchasing the Preferred Shares, the
Warrants, the Common Stock issuable upon exercise of the Warrants (the "WARRANT
SHARES"), the Common Stock, if any, issuable in payment of dividends on the
Preferred Shares (the "DIVIDEND SHARES"), and the Common Stock issuable upon
conversion or redemption of the Preferred Shares (the "CONVERSION SHARES" and,
collectively with the Preferred Shares, the Warrants, the Warrant Shares and the
Dividend Shares, the "SECURITIES") for its own account, for investment purposes
only and not with a view towards or in connection with the public sale or
distribution thereof in violation of the Securities Act.
B. Buyer is (i) an "ACCREDITED INVESTOR" within the
meaning of Rule 501 of Regulation D under the Securities Act, (ii) experienced
in making investments of the kind contemplated by this Agreement, (iii) capable,
by reason of its business and financial experience, of evaluating the relative
merits and risks of an investment in the Securities, and (iv) able to afford the
loss of its investment in the Securities.
C. Buyer understands that the Securities are being
offered and sold by the Company in reliance on an exemption from the
registration requirements of the Securities Act and equivalent state securities
and "blue sky" laws, and that the Company is relying upon the accuracy of, and
Buyer's compliance with, Buyer's representations, warranties and covenants set
forth in this Agreement to determine the availability of such exemption and the
eligibility of Buyer to purchase the Securities;
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<PAGE> 3
D. Buyer understands that the Securities have not been
approved or disapproved by the Securities and Exchange Commission (the
"COMMISSION") or any state securities commission.
E. This Agreement has been duly and validly authorized,
executed and delivered by Buyer and is a valid and binding agreement of Buyer
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally and except as
rights to indemnity and contribution may be limited by federal or state
securities laws or the public policy underlying such laws.
F. Neither Buyer nor its affiliates nor any person acting
on its or their behalf has the intention of entering, or will enter into, prior
to the closing, any put option, short position or other similar instrument or
position with respect to the Common Stock and neither Buyer nor any of its
affiliates nor any person acting on its or their behalf will use at any time
shares of Common Stock acquired pursuant to this Agreement to settle any put
option, short position or other similar instrument or position that may have
been entered into prior to the execution of this Agreement.
G. Buyer understands that there will be no market for the
Preferred Shares, that there are significant restrictions on the transferability
of the Preferred Shares and that, for these and other reasons, Buyer may not be
able to liquidate an investment in the Preferred Shares for an indefinite
period.
H. Buyer acknowledges that the Company's Articles of
Incorporation provide that no person or entity may become the beneficial owner
of 5% or more of the Company's shares of capital stock of every series and class
unless such person or entity agrees to provide personal background and financial
information to gaming authorities, consent to a background investigation and
respond to questions from gaming authorities. Buyer further acknowledges that
the Company may, pursuant to the terms of its Articles of Incorporation and
Section 6.5 of the Certificate of Designation, repurchase shares held by any
person or entity whose status as a shareholder jeopardizes the approval,
continued existence or renewal by any gaming authority of a tribal, federal or
state license or franchise held by the Company or any of its Subsidiaries. The
foregoing restrictions will be contained in a legend on each certificate of
Common Stock.
III. THE COMPANY'S REPRESENTATIONS
The Company represents and warrants to Buyer that:
A. CAPITALIZATION.
1. The authorized capital stock of the Company
consists solely of 100,000,000 shares of capital stock, of which
(i) 7,501,648 shares of common stock are issued and outstanding on
the date hereof (ii) 4,000 shares have been designated Series B
Convertible Preferred Stock, par value $0.01 per share, of which
825 shares are issued and outstanding on the date hereof and (iii)
2,000 shares have been designated Series C Cumulative Convertible
Preferred Stock, par value $0.01 per share, of which 1,400 shares
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<PAGE> 4
are issued and outstanding on the date hereof. All of the issued
and outstanding shares of Common Stock and preferred stock, if any,
have been duly authorized and validly issued and are fully paid and
nonassessable. As of the date hereof, the Company has outstanding
stock options to purchase 978,000 shares of Common Stock and
outstanding warrants to purchase 1,250,000 shares of Common Stock.
2. The Conversion Shares, the Dividend Shares and
the Warrant Shares have been duly and validly authorized and
reserved for issuance by the Company, and when issued by the
Company upon conversion of, or in lieu of cash dividends on, the
Preferred Shares and on exercise of the Warrants will be duly and
validly issued, fully paid and nonassessable and will not subject
the holder thereof to personal liability by reason of being such
holder.
3. Except as disclosed on Schedule III.A.3.
hereto, there are no preemptive, subscription, "call," right of
first refusal or other similar rights to acquire any capital stock
of the Company or any of its Subsidiaries or other voting
securities of the Company that have been issued or granted to any
person or any other obligations of the Company or any of its
Subsidiaries to issue, grant, extend or enter into any security,
option, warrant, "call," right, commitment, agreement, arrangement
or undertaking with respect to any of their respective capital
stock.
4. Schedule III.A.4. hereto lists all the
subsidiaries of the Company (the "SUBSIDIARIES"). Except as
disclosed on Schedule III.A.4. hereto, the Company does not own or
control, directly or indirectly, any interest in any other
corporation, partnership, limited liability company, unincorporated
business organization, association, trust or other business entity.
5. The Company has delivered to Buyer complete and
correct copies of the Certificate of Incorporation and the By-Laws
of each of the Company and the Subsidiaries, in each case as
amended to the date of this Agreement. Except as set forth on
Schedule III.A.5. hereto, the Company has delivered to Buyer true
and complete copies of all minutes of the Board of Directors of the
Company (the "BOARD OF DIRECTORS") since October 1, 1996.
B. ORGANIZATION; REPORTING COMPANY STATUS.
1. Each of the Company and the Subsidiaries is a
corporation duly organized, validly existing and in good standing
under the laws of the state of jurisdiction in which it is
incorporated and is duly qualified as a foreign corporation in all
jurisdictions in which the failure to so qualify would reasonably
be expected to have a material adverse effect on the business,
properties, prospects, condition (financial or otherwise) or
results of operations of the Company and the Subsidiaries taken as
a whole or on the consummation of any of the transactions
contemplated by this Agreement (a "MATERIAL ADVERSE EFFECT").
2. The Company has registered the Common Stock
pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT").
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The Common Stock is listed and traded on the Nasdaq National Market
("NASDAQ") and the Company has not received any notice regarding,
and to its knowledge there is no threat of, the termination or
discontinuance of the eligibility of the Common Stock for such
listing.
C. AUTHORIZED SHARES. The Company (i) has duly and
validly authorized and reserved for issuance 1,500,000 shares of Common Stock,
sufficient in number for the conversion of and the payment of dividends (in lieu
of cash payments) on the 500 Preferred Shares in accordance with the Certificate
of Designation and the exercise of the Warrants, and (ii) at all times from and
after the date hereof shall have a sufficient number of shares of Common Stock
duly and validly authorized and reserved for issuance to satisfy the conversion
of Preferred Shares, the payment of dividends (in lieu of cash payments) on the
Preferred Shares and the exercise of the Warrants and (iii) at all times from
and after the date hereof shall have a sufficient number of shares of Common
Stock duly and validly authorized and reserved for issuance to satisfy the
conversion of Preferred Shares, the payment of dividends (in lieu of cash
payments) on the Preferred Shares and the exercise of the Warrants. The Company
understands and acknowledges the potentially dilutive effect to the Common Stock
of the issuance of the Preferred Shares, the Conversion Shares, the Dividend
Shares and the Warrant Shares upon the conversion of, and payment of dividends
on, the Preferred Shares and the exercise of the Warrants, respectively. The
Company further acknowledges that its obligation to issue Conversion Shares upon
conversion of the Preferred Shares and Warrant Shares upon exercise of the
Warrants in accordance with this Agreement, the Certificate of Designation and
the Warrants is absolute and unconditional regardless of the dilutive effect
that such issuance may have on the ownership interests of other stockholders of
the Company and notwithstanding the commencement of any case under 11 U.S.C. ss.
101 et seq. (the "BANKRUPTCY CODE"). In the event the Company is a debtor under
the Bankruptcy Code, the Company hereby waives to the fullest extent permitted
any rights to relief it may have under 11 U.S.C. ss. 362 in respect of the
conversion of the Preferred Shares and the exercise of the Warrants. The Company
agrees, without cost or expense to Buyer, to take or consent to any and all
action necessary to effectuate relief under 11 U.S.C. ss. 362. Schedule III.C.
hereto sets forth (a) all issuances and sales by the Company since December 31,
1998 of its capital stock, and other securities convertible, exercisable or
exchangeable for capital stock of the Company, except for shares issued upon
exercise of options granted pursuant to the Company's 1992 Stock Option and
Compensation Plan, the Company's 1998 Non-Executive Stock Option Plan or the
Company 1997 Director's Stock Option Plan, (b) the amount of such securities
sold, including any underlying shares of capital stock, (c) the purchaser
thereof, (d) the amount paid therefor, and (e) the material terms of all
outstanding capital stock of the Company (other than the Common Stock).
D. AUTHORITY; VALIDITY AND ENFORCEABILITY. The Company
has the requisite corporate power and authority to file and perform its
obligations under the Certificate of Designation and to enter into the Documents
(as hereinafter defined), and to perform all of its obligations hereunder and
thereunder (including the issuance, sale and delivery to Buyer of the
Securities). The execution, delivery and performance by the Company of the
Documents, and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the filing of the Certificate
of Designation with the Minnesota Secretary of State's office, the issuance of
the Preferred Shares, the Warrants and the issuance and reservation for issuance
of the Conversion Shares, the Dividend Shares and the Warrant
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<PAGE> 6
Shares), have been duly authorized by all necessary corporate action on the part
of the Company. Each of the Documents has been duly and validly executed and
delivered by the Company and the Certificate of Designation has been duly filed
with the Minnesota Secretary of State's office by the Company and each Document
constitutes a valid and binding obligation of the Company enforceable against it
in accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and except as rights to indemnity and
contribution may be limited by federal or state securities laws or the public
policy underlying such laws. The Securities have been duly and validly
authorized for issuance by the Company and, when executed and delivered by the
Company, will be valid and binding obligations of the Company enforceable
against it in accordance with their terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally. For purposes of this
Agreement, the term "DOCUMENTS" means (i) this Agreement; (ii) the Registration
Rights Agreement of even date herewith between the Company and Buyer, a copy of
which is annexed hereto as Exhibit D (the "REGISTRATION RIGHTS AGREEMENT");
(iii) the Certificate of Designation; (iv) the Warrants; and (v) the Escrow
Instructions.
E. VALIDITY OF ISSUANCE OF THE SECURITIES. As of the
Closing Date, the Preferred Shares and the Warrants, and the Conversion Shares,
the Dividend Shares and the Warrant Shares upon their issuance in accordance
with the Certificate of Designation, respectively, will be validly issued and
outstanding, fully paid and nonassessable, and not subject to any preemptive
rights, rights of first refusal, tag-along rights, drag-along rights or other
similar rights.
F. NON-CONTRAVENTION. Except as set forth on Schedule
III.F. hereto, the execution and delivery by the Company of the Documents, the
issuance of the Securities, and the consummation by the Company of the other
transactions contemplated hereby and thereby, including, without limitation, the
filing of the Certificate of Designation with the Minnesota Secretary of State's
office, do not, and compliance with the provisions of this Agreement and other
Documents will not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any obligation or loss of
a material benefit under, or result in the creation of any Lien (as defined
below) upon any of the properties or assets of the Company or any of its
Subsidiaries under, or result in the termination of, or require that any consent
be obtained or any notice be given with respect to, (i) the Articles of
Incorporation or By-Laws of the Company or the comparable charter or
organizational documents of any of its Subsidiaries, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease, contract or other agreement,
instrument or permit applicable to the Company or any of its Subsidiaries or
their respective properties or assets, or (iii) any Law (as defined below)
applicable to the Company or any of its Subsidiaries or their respective
properties or assets.
G. APPROVALS. Except as set forth on Schedule III.G.
hereto, no authorization, approval or consent of any court or public or
governmental authority is required to be obtained by the Company for the
issuance and sale of the Preferred Shares or the Warrants (and the Conversion
Shares and Warrant Shares) to Buyer as contemplated by this Agreement, except
such authorizations, approvals and consents that have been obtained by the
Company prior to the date hereof.
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<PAGE> 7
H. COMMISSION FILINGS. The Company has properly and
timely filed with the Commission all reports, proxy statements, forms and other
documents required to be filed with the Commission under the Securities Act and
the Exchange Act since October 1, 1996 (the "COMMISSION FILINGS"). As of their
respective dates, (i) the Commission Filings complied in all material respects
with the requirements of the Securities Act, or the Exchange Act, as the case
may be, and the rules and regulations of the Commission promulgated thereunder
applicable to such Commission Filings, and (ii) none of the Commission Filings
contained at the time of their filing any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the Commission Filings, as of the dates of such documents, were true and
complete in all material respects and complied with applicable accounting
requirements and the published rules and regulations of the Commission with
respect thereto, have been prepared in accordance with generally accepted
accounting principles in the United States ("GAAP") (except in the case of the
unaudited statements, as permitted by Form 10-Q under the Exchange Act) applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly presented the consolidated financial position of
the Company and its Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments that
in the aggregate are not material and to any other adjustment described
therein).
I. ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet
Date (as defined in Section III.M.), there has not occurred any change, event or
development in the business, financial condition, prospects or results of
operations of the Company or any of the Subsidiaries, except as disclosed in the
Commission Filings, there has not existed any condition having or reasonably
likely to have a Material Adverse Effect, and the Company and the Subsidiaries
have conducted there respective businesses only in the ordinary course.
J. FULL DISCLOSURE. There is no fact known to the Company
(other than general economic or industry conditions known to the public
generally) that has not been fully disclosed in writing to Buyer that (i)
reasonably could be expected to have a Material Adverse Effect or (ii)
reasonably could be expected to materially and adversely affect the ability of
the Company to perform its obligations pursuant to the Documents.
K. ABSENCE OF LITIGATION. Except as set forth on Schedule
III.K., there are (i) no suits, actions or proceedings pending or, to the
knowledge of the Company, threatened against the Company or any of its
Subsidiaries, (ii) no complaints, lawsuits, charges or other proceedings pending
or, to the knowledge of the Company, threatened in any forum by or on behalf of
any present or former employee of the Company or any of its Subsidiaries, any
applicant for employment or classes of the foregoing alleging breach of any
express or implied contract of employment, any applicable law governing
employment or the termination thereof or other discriminatory, wrongful or
tortuous conduct in connection with the employment relationship, and (iii) no
judgments, decrees, injunctions or orders of any governmental entity or
arbitrator outstanding against the Company or any Subsidiary.
L. ABSENCE OF EVENTS OF DEFAULT. Except as set forth on
Schedule III.L., no "EVENT OF DEFAULT" (as defined in any agreement or
instrument to which the Company is a party)
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<PAGE> 8
and no event which, with notice, lapse of time or both, would constitute an
Event of Default (as so defined), has occurred and is continuing.
M. FINANCIAL STATEMENTS; NO UNDISCLOSED LIABILITIES. The
Company has delivered to Buyer true and complete copies of the (i) audited
balance sheet of the Company and the Subsidiaries as at December 31, 1998, 1997
and 1996, respectively, and the related audited statements of income, changes in
stockholders' equity and cash flows for the three fiscal years ended December
31, 1998, including the related notes and schedules thereto and (ii) unaudited
balance sheets of the Company and the Subsidiaries and the statements of income,
changes in stockholders' equity and cash flows for each fiscal quarter ended
since December 31, 1998, including the related notes and schedules, all
certified by the chief financial officer of the Company (collectively, the
"FINANCIAL STATEMENTS"), and all management letters, if any, from the Company's
independent auditors relating to the dates and periods covered by the Financial
Statements. Each of the Financial Statements is complete and correct in all
material respects, has been prepared in accordance with GAAP (subject, in the
case of the interim Financial Statements, to normal year end adjustments and the
absence of footnotes), and fairly presents the financial position, results of
operations and cash flows of the Company as at the dates and for the periods
indicated. For purposes hereof, the audited balance sheet of the Company as at
December 31, 1998 is hereinafter referred to as the "BALANCE SHEET" and December
31, 1998 is hereinafter referred to as the "BALANCE SHEET DATE". The Company has
no indebtedness, obligations or liabilities of any kind (whether accrued,
absolute, contingent or otherwise, and whether due or to become due), which was
not fully reflected in, reserved against or otherwise described in the Balance
Sheet or the notes thereto or was not incurred in the ordinary course of
business consistent with the Company's past practices since the Balance Sheet
Date.
N. COMPLIANCE WITH LAWS; PERMITS. Each of the Company and
the Subsidiaries has complied is in compliance with all laws, rules,
regulations, codes, ordinances and statutes (collectively, "LAWS") applicable to
it or to the conduct of its business. Each of the Company and the Subsidiaries
possesses all material permits, approvals, authorizations, licenses,
certificates and consents from all public and governmental authorities which are
necessary to conduct its business.
O. RELATED PARTY TRANSACTIONS. Except as set forth on
Schedule III.O. hereto, neither the Company nor any of its officers, directors
or "AFFILIATES" (as such term is defined in Rule 12b-2 under the Exchange Act)
nor any family member of any officer, director or Affiliate of the Company has
borrowed any moneys from or has outstanding any indebtedness or other similar
obligations to the Company or any of the Subsidiaries. Except as set forth on
Schedule III.O. hereto, neither the Company nor any of its officers, directors
or Affiliates nor any family member of any officer, director or Affiliate of the
Company (i) owns any direct or indirect interest constituting more than a 1%
equity (or similar profit participation) interest in, or controls or is a
director, officer, partner, member or employee of, or consultant to or lender to
or borrower from, or has the right to participate in the profits of, any person
or entity which is (x) a competitor, supplier, customer, landlord, tenant,
creditor or debtor of the Company or any Subsidiary, (y) engaged in a business
related to the business of the Company or any Subsidiary, or (z) a participant
in any transaction to which the Company or any Subsidiary is a party or (ii) is
a party to any contract, agreement, commitment or other arrangement with the
Company or any Subsidiary.
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P. INSURANCE. Each of the Company and the Subsidiaries
maintains property and casualty, general liability, workers' compensation,
environmental hazard, personal injury and other similar types of insurance with
financially sound and reputable insurers that is adequate, consistent with
industry standards and the Company's historical claims experience. None of the
Company and the Subsidiaries has received notice from, and none of them has
knowledge of any threat by, any insurer (that has issued any insurance policy to
the Company or any Subsidiary) that such insurer intends to deny coverage under
or cancel, discontinue or not renew any insurance policy presently in force.
Q. SECURITIES LAW MATTERS. Assuming the accuracy of the
representations and warranties of Buyer set forth in Section II hereof, the
offer and sale by the Company of the Securities is exempt from (i) the
registration and prospectus delivery requirements of the Securities Act and the
rules and regulations of the Commission thereunder and (ii) the registration
and/or qualification provisions of all applicable state securities and "blue
sky" laws. Other than pursuant to an effective registration statement under the
Securities Act, the Company has not issued, offered or sold the Preferred Shares
or any shares of Common Stock (including for this purpose any securities of the
same or a similar class as the Preferred Shares or Common Stock, or any
securities convertible into or exchangeable or exercisable for the Preferred
Shares or Common Stock or any such other securities) within the one-year next
preceding the date hereof, except as disclosed on Schedule III.Q. hereto or
otherwise previously disclosed in writing to Buyer, and the Company shall not
directly or indirectly take, and shall not permit any of its directors, officers
or Affiliates directly or indirectly to take, any action (including, without
limitation, any offering or sale to any person or entity of the Preferred Shares
or shares of Common Stock), so as to make unavailable the exemption from
Securities Act registration being relied upon by the Company for the offer and
sale to Buyer of the Preferred Shares and the Warrants (and the Conversion
Shares and the Warrant Shares) as contemplated by this Agreement. No form of
general solicitation or advertising has been used or authorized by the Company
or any of its officers, directors or Affiliates in connection with the offer or
sale of the Preferred Shares and the Warrants (and the Conversion Shares and the
Warrant Shares) as contemplated by this Agreement or any other agreement to
which the Company is a party.
R. ENVIRONMENTAL MATTERS.
Except as set forth on Schedule III.R. hereto:
1. The Company, the Subsidiaries and their
respective operations are in compliance with all applicable
Environmental Laws and all permits (including terms, conditions,
and limitations therein) issued pursuant to Environmental Laws or
otherwise;
2. Each of the Company and each of the
Subsidiaries has all permits, licenses, waivers, exceptions, and
exemptions required under all applicable Environmental Laws
necessary to operate its business;
3. Each of the Company and each of the
Subsidiaries is not the subject of any outstanding written order of
or agreement with any governmental authority or person respecting
(i) Environmental Laws or permits, (ii) Remedial Action or (iii)
any Release or threatened Release of Hazardous Materials;
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4. Each of the Company and each of the
Subsidiaries has not received any written communication alleging
that it may be in violation of any Environmental Law or any permit
issued pursuant to any Environmental Law, or may have any liability
under any Environmental Law;
5. Each of the Company and each of the
Subsidiaries does not have any liability, contingent or otherwise,
in connection with any presence, treatment, storage, disposal or
Release of any Hazardous Materials whether on property owned or
operated by the Company and the Subsidiaries or property of third
parties, and the Company and the Subsidiaries have not transported,
or arranged for transportation of, any Hazardous Materials for
treatment or disposal of any property;
6. There are no investigations of the business,
operations, or currently or previously owned, operated or leased
property of the Company and the Subsidiaries pending or threatened
which could lead to the imposition of any case or liability
pursuant to any Environmental Law;
7. There is not located at any of the properties
owned or operated by the Company and the Subsidiaries any (A)
underground storage tanks, (B) asbestos-containing material or (C)
equipment containing polychlorinated biphenyls; and,
8. Each of the Company and each of the
Subsidiaries has provided to Buyer all environmentally related
assessments, audits, studies, reports, analyses, and results of
investigations that have been performed with respect to the
currently or previously owned, leased or operated properties or
activities of the Company and the Subsidiaries.
9. There are no liens arising under or pursuant to
any Environmental Law on any real property owned, operated, or
leased by the Company and the Subsidiaries, and no action of any
governmental authority has been taken or, to the knowledge of the
Company, is in process of being taken which could subject any of
such properties to such liens, and the Company and the Subsidiaries
have not and is not expected to be required to place any notice or
restriction relating to the presence of Hazardous Material at any
real property owned, operated, or leased by it in any deed to such
property.
10. Neither the Company nor any of the Subsidiaries
does own, operate, or lease any hazardous waste generation,
treatment, storage, or disposal facility, as such terms are used
pursuant to the RCRA and related or analogous state, local, or
foreign law. None of the properties owned, operated, or leased by
the Company, the Subsidiaries or any predecessor thereof are now,
or were in the past, used in any part as a dump, landfill, or
disposal site, and neither Company, the Subsidiaries nor any
predecessor thereof have filled any wetlands.
11. The purchase that is the subject of this
Agreement will not require any governmental approvals under
Environmental Laws, including those that are triggered by sales or
transfers of businesses or real property, including, as examples
and
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without limitation, the New Jersey Industrial Site Recovery Act,
N.J. Stat. 13:1K-7 et seq., and the Connecticut Transfer of
Establishments Act, Conn. Gen. Stat. ss. 22a-134 et seq.
12. There is no currently existing requirement or
requirement to be imposed in the future by any Environmental Law or
Environmental Permit which could result in the incurrence of a cost
that could be reasonably expected to have a Material Adverse
Effect.
13. Each of the Company and each of the
Subsidiaries has disclosed to Buyer all other acts or conditions
that could result in an costs or liabilities under Environmental
Laws.
For purposes of this Section III.R.:
"ENVIRONMENTAL LAW" means any foreign, federal, state or local
statute, regulation, ordinance, or common law as now or hereafter in effect in
any way relating to the protection of human health, safety or welfare, or the
environment including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act, the Hazardous Materials Transportation
Act, the Resource Conservation and Recovery Act ("RCRA"), the Clean Water Act,
the Clean Air Act, the Toxic Substances Control Act, the Federal Insecticide,
Fungicide, and Rodenticide Act, and the Occupational Safety and Health Act, and
the regulations promulgated pursuant thereto.
"HAZARDOUS MATERIAL" means any substance that is listed,
classified or regulated pursuant to any Environmental Law, including petroleum,
gasoline, and any other petroleum product, by-product, fraction or derivative,
asbestos or asbestos-containing material, lead-containing paint, water, or
plumbing, polychlorinated biphenyls, radioactive materials and radon;
"RELEASE" means any placement, release, spill, filtration,
emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal,
migration, or leaching to, through, or under the indoor or outdoor environment,
or into, through, under, or out of any property;
"REMEDIAL ACTION" means all actions to (x) clean up, remove,
remediate, treat or in any other way address any Hazardous Material; (y) prevent
or contain the Release of any Hazardous Material; or (z) perform studies and
investigations or post-remedial monitoring and care in relation to (x) and (y)
above.
S. LABOR MATTERS. Neither the Company nor any of the
Subsidiaries is party to any labor or collective bargaining agreement and there
are no labor or collective bargaining agreements which pertain to employees of
the Company. No employees of the Company or the Subsidiaries are represented by
any labor organization and none of such employees has made a pending demand for
recognition, and there are no representation proceedings or petitions seeking a
representation proceeding presently pending or, to the Company's knowledge,
threatened to be brought or filed, with the National Labor Relations Board or
other labor relations tribunal. There is no organizing activity involving the
Company or the Subsidiaries pending or to the Company's knowledge, threatened by
any labor organization or group of employees of the Company or the
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<PAGE> 12
Subsidiaries. There are no (i) strikes, work stoppages, slowdowns, lockouts or
arbitrations or (ii) material grievances or other labor disputes pending or, to
the knowledge of the Company, threatened against or involving the Company or the
Subsidiaries. There are no unfair labor practice charges, grievances or
complaints pending or, to the knowledge of the Company, threatened by or on
behalf of any employee or group of employees of the Company or the Subsidiaries.
T. ERISA MATTERS. All Plans maintained by the Company,
its Subsidiaries and ERISA Affiliates are listed in Schedule III.T. and copies
of all documentation relating to such Plans (including, but not limited to,
copies of written Plans, written descriptions of oral Plans, summary plan
descriptions, trust agreements, the three most recent annual returns, employee
communications and IRS determination letters) have been delivered or made
available for review by the Buyer. Each Plan has at all times been maintained
and administered in all material respects in accordance with its terms and the
requirements of applicable law, including ERISA and the Code, and each Plan
intended to qualify under Section 401(a) of the Code has at all times since its
adoption been so qualified, and each trust which forms a part of any such plan
has at all times since its adoption been tax-exempt under Section 501(a) of the
Code. The Company, its Subsidiaries and its ERISA Affiliates are in compliance
in all material respects with all provisions of ERISA applicable to it. No
Reportable Event has occurred, been waived or exists as to which the Company,
its Subsidiaries or any ERISA Affiliate was required to file a report with the
PBGC, and the present value of all liabilities under each Pension Plan (based on
those assumptions used to fund such Plans) listed in Schedule III.T. did not, as
of the most recent annual valuation date applicable thereto, exceed the value of
the assets of such Pension Plan. None of the Company, its Subsidiaries or ERISA
Affiliates has incurred, or reasonably expects to incur, any Withdrawal
Liability with respect to any Multi-employer Plan that could result in a
Material Adverse Effect. None of the Company, its Subsidiaries or ERISA
Affiliates has received any notification that any Multi-employer Plan is in
reorganization or has been terminated within the meaning of Title IV of ERISA,
and no Multi-employer Plan is reasonably expected to be in reorganization or
termination where such reorganization or termination has resulted or could
reasonably be expected to result in increases to the contributions required to
be made to such Plan or otherwise. No direct, contingent or secondary liability
has been incurred or is expected to be incurred by the Company or its
Subsidiaries under Title IV of ERISA to any party with respect to any Plan, or
with respect to any other Plan presently or heretofore maintained or contributed
to by any ERISA Affiliate. Neither the Company, its Subsidiaries, or ERISA
Affiliate has incurred any liability for any tax imposed under section 4971
through 4980B of the Code or civil liability under section 502(i) or (l) of
ERISA. No suit, action or other litigation (excluding claims for benefits
incurred in the ordinary course of plan activities and any other claim which
could reasonably be expected to result in a material liability or expense to the
Company, its Subsidiaries or ERISA Affiliates) has been brought or, to the
knowledge of the Company, threatened against or with respect to any Plan and
there are no facts or circumstances known to the Company, its Subsidiaries or
ERISA Affiliates that could reasonably be expected to give rise to any such
suit, action or other litigation. All contributions to Plans that were required
to be made under such Plans have been made, and all benefits accrued under any
unfunded Plan have been paid, accrued or otherwise adequately reserved in
accordance with generally accepted accounting principles, all of which accruals
under unfunded Plans are as disclosed in Schedule III.T., and the Company, its
Subsidiaries and ERISA Affiliates have each performed all material obligations
required to be performed under all Plans. The
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<PAGE> 13
execution, delivery and performance of this Agreement, the Note, the Warrants
and the Registration Rights Agreement and the consummation of the transactions
contemplated hereby and thereby (including, without limitation, the offer, issue
and sale by the Company and its Subsidiaries, and the purchase by the Buyer, of
the Preferred Shares, the Conversion Shares, the Warrants, the Warrant Shares
and Dividend Shares) will not involve any "prohibited transaction" within the
meaning of ERISA or the Code with respect to any Plan.
For purposes of this Section III.T.:
"ERISA" means the Employee Retirement Income Security Act of
1974, or any successor statute, together with the regulations thereunder, as the
same may be amended from time to time.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) that was, is or hereafter may become, a member of a group of which
the Company is a member and which is treated as a single employer under Section
414 of the Internal Revenue Code of 1986, as amended (the "INTERNAL REVENUE
CODE").
"MULTI-EMPLOYER PLAN" means a multi-employer plan as defined
in Section 4001(a)(3) of ERISA to which the Company or any ERISA Affiliate
(other than one considered an ERISA Affiliate only pursuant to subsection (m) or
(o) of Section 414 of the Internal Revenue Code) is making or accruing an
obligation to make contributions, or has within any of the preceding six plan
years made or accrued an obligation to make contributions.
"PBGC" means the Pension Benefit Guaranty Corporation referred
to and defined in ERISA or any successor thereto.
"PLAN" means any bonus, incentive compensation, deferred
compensation, pension, profit sharing, retirement, stock purchase, stock option,
stock ownership, stock appreciation rights, phantom stock, leave of absence,
layoff, vacation, day or dependent care, legal services, cafeteria, life,
health, accident, disability, workmen's compensation or other insurance,
severance, separation or other employee benefit plan, practice, policy or
arrangement of any kind, whether written or oral, or whether for the benefit of
a single individual or more than one individual including, but not limited to,
any "employee benefit plan" within the meaning of Section 3(3) of ERISA,
including any Pension Plan.
"PENSION PLAN" means any pension plan (other than a
Multi-employer Plan) subject to the provision of Title IV of ERISA or Section
412 of the Internal Revenue Code that is maintained for employees of the
Company, its Subsidiaries, or any ERISA Affiliate.
"REPORTABLE EVENT" means any reportable event as defined in
Section 4043(b) of ERISA or the regulations issued thereunder with respect to a
Plan.
"WITHDRAWAL LIABILITY" means liability to a Multi-employer
Plan as a result of a complete or partial withdrawal from such Multi-employer
Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.
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<PAGE> 14
U. TAX MATTERS.
1. The Company has filed all material Tax Returns
which it is required to file under applicable Laws; all such Tax
Returns are true and accurate in all material respects and have
been prepared in compliance with all applicable Laws; the Company
has paid all Taxes due and owing by it (whether or not such Taxes
are required to be shown on a Tax Return) and has withheld and paid
over to the appropriate taxing authorities all Taxes which it is
required to withhold from amounts paid or owing to any employee,
stockholder, creditor or other third parties; and since the Balance
Sheet Date, the charges, accruals and reserves for Taxes with
respect to the Company (including any provisions for deferred
income taxes) reflected on the books of the Company are adequate to
cover any Tax liabilities of the Company if its current tax year
were treated as ending on the date hereof.
2. No claim has been made by a taxing authority in
a jurisdiction where the Company does not file tax returns that
such corporation is or may be subject to taxation by that
jurisdiction. There are no foreign, federal, state or local tax
audits or administrative or judicial proceedings pending or being
conducted with respect to the Company; no information related to
Tax matters has been requested by any foreign, federal, state or
local taxing authority; and, except as disclosed above, no written
notice indicating an intent to open an audit or other review has
been received by the Company from any foreign, federal, state or
local taxing authority. There are no material unresolved questions
or claims concerning the Company's Tax liability. The Company (A)
has not executed or entered into a closing agreement pursuant to
Section 7121 of the Internal Revenue Code or any predecessor
provision thereof or any similar provision of state, local or
foreign law; or (B) has not agreed to or is required to make any
adjustments pursuant to Section 481(a) of the Internal Revenue Code
or any similar provision of state, local or foreign law by reason
of a change in accounting method initiated by the Company or any of
its subsidiaries or has any knowledge that the IRS has proposed any
such adjustment or change in accounting method, or has any
application pending with any taxing authority requesting permission
for any changes in accounting methods that relate to the business
or operations of the Company. The Company has not been a United
States real property holding corporation within the meaning of
Section 897(c)(2) of the Internal Revenue Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the
Internal Revenue Code.
3. The Company has not made an election under
Section 341(f) of the Internal Revenue Code. The Company is not
liable for the Taxes of another person that is not a subsidiary of
the Company under (A) Treas. Reg. Section 1.1502-6 (or comparable
provisions of state, local or foreign law), (B) as a transferee or
successor, (C) by contract or indemnity or (D) otherwise. The
Company is not a party to any tax sharing agreement. The Company
has not made any payments, is obligated to make payments or is a
party to an agreement that could obligate it to make any payments
that would not be deductible under Section 280G of the Internal
Revenue Code.
For purposes of this Section III.U.:
14
<PAGE> 15
"IRS" means the United States Internal Revenue Service.
"TAX" or "TAXES" means federal, state, county, local, foreign,
or other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"TAX RETURN" means any return, information report or filing
with respect to Taxes, including any schedules attached thereto and including
any amendment thereof.
V. PROPERTY. Except as set forth on Schedule III.V., each
of the Company and each of the Subsidiaries has good and marketable title to all
of its assets and properties material to the conduct of its business, free and
clear of any liens, pledges, security interests, claims, encumbrances or other
restrictions of any kind (collectively, "LIENS"). With respect to any assets or
properties it leases, each of the Company and its Subsidiaries holds a valid and
subsisting leasehold interest therein, free and clear of any Liens, is in
compliance, in all material respects, with the terms of the applicable lease,
and enjoys peaceful and undisturbed possession under such lease. All of the
assets and properties of the Company and its Subsidiaries that are material to
the conduct of business as presently conducted or as proposed to be conducted by
it are in good operating condition and repair. Except as reserved for, the
inventory of the Company and its Subsidiaries is in good and marketable
condition, does not include any material quantity of items which are obsolete,
damaged or slow moving, and is salable (or may be leased) in the normal course
of business as currently conducted by it.
W. INTELLECTUAL PROPERTY. The Company owns or possesses
adequate and enforceable rights to use all patents, patent applications,
trademarks, trademark applications, trade names, service marks, copyrights,
copyright applications, licenses, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures) and other similar rights and proprietary knowledge (collectively,
"INTANGIBLES") necessary for the conduct of its business as now being conducted
including, but not limited to, those described on Schedule III.W. hereto. Except
as set forth on Schedule III.W, the Company has all right, title and interest in
all of the Intangibles, free and clear of any and all Liens. The Company is not
infringing upon or in conflict with any right of any other person with respect
to any Intangibles. Except as disclosed on Schedule III.W. hereto, (i) no claims
have been asserted by any individual, partnership, corporation, unincorporated
organization or association, limited liability company, trust or other entity
(collectively, a "PERSON") contesting the validity, enforceability, use or
ownership of any Intangibles, and the Company has no knowledge of any basis for
such claim, and (ii) neither the Company nor the Subsidiaries has any knowledge
of infringement or misappropriation of the Intangibles by any third party.
X. CONTRACTS. All contracts, agreements, notes,
instruments, franchises, leases, licenses, commitments, arrangements or
understanding, written or oral (collectively, "CONTRACTS") which are material to
the business and operations of the Company and the Subsidiaries are in full
force and effect and constitute legal, valid and binding obligations of the
15
<PAGE> 16
Company and the Subsidiaries and, to the best knowledge of the Company, the
other parties thereto; the Company and the Subsidiaries and, to the best
knowledge of the Company, each other party thereto, have performed in all
material respects all obligations required to be performed by them under the
Contracts, and no material violation or default exists in respect thereof, nor
any event that with notice or lapse of time, or both, would constitute a default
thereof, on the part of the Company and the Subsidiaries or, to the best
knowledge of the Company, any other party thereto; none of the Contracts is
currently being renegotiated; and the validity, effectiveness and continuation
of all Contracts will not be materially adversely affected by the transactions
contemplated by this Agreement.
Y. REGISTRATION RIGHTS. Except as set forth on Schedule
III.Y., no Person has, and as of the Closing (as defined below), no Person shall
have, demand, "piggy-back" or other rights to cause the Company to file any
registration statement under the Securities Act, relating to any of its
securities or to participate in any such registration statement.
Z. DIVIDENDS. The timely payment of dividends on the
Preferred Shares as specified in the Certificate of Designation is not
prohibited by the Certificate of Incorporation or By-Laws of the Company or any
agreement, contract, documents or other undertaking to which the Company or any
of the Subsidiaries is a party.
AA. INVESTMENT COMPANY ACT. Neither the Company nor any of
the Subsidiaries is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT"), nor is the
Company nor any of the Subsidiaries directly or indirectly controlled by or
acting on behalf of any Person which is an "investment company" within the
meaning of the Investment Company Act.
BB. BUSINESS PLAN. Any business information of the Company
previously submitted to Buyer in any form, including the projections contained
therein, was prepared by the senior management of the Company in good faith and
is based on assumptions that the Company believes are reasonable. The Company is
not aware of any fact or condition that could reasonably be expected to result
in the Company not achieving the results described in such business plan.
CC. YEAR 2000 COMPLIANCE. The Company is currently
reviewing its products, business and operations that could be adversely affected
by the risk that computer applications used by the Company and the Subsidiaries
may be unable to recognize and properly perform date-sensitive functions
involving dates prior to and after December 31, 1999 (the "YEAR 2000 PROBLEM").
The Company believes its internal information and business systems will be able
to perform properly date-sensitive functions for all dates before and after
January 1, 2000. In addition, the Company is currently surveying those vendors,
suppliers and other third parties (collectively, the "OUTSIDE PARTIES") with
which the Company and the Subsidiaries do business and whose failure to
adequately address the Year 2000 Problem could reasonably be expected to
adversely affect the business and operations of the Company and the
Subsidiaries. Based upon the aforementioned internal review and surveys of the
Outside Parties as of the date of this Agreement, the Year 2000 Problem has not
resulted in, and is not reasonably expected to have, a Material Adverse Effect.
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<PAGE> 17
DD. INTERNAL CONTROLS AND PROCEDURES. The Company
maintains accurate books and records and internal accounting controls that
provide reasonable assurance that (i) all transactions to which the Company or
each of the Subsidiaries is a party or by which its properties are bound are
executed with management's authorization; (ii) the reported accountability of
the Company's and the Subsidiaries' assets is compared with existing assets at
regular intervals; (iii) access to the Company's and the Subsidiaries' assets is
permitted only in accordance with management's authorization; and (iv) all
transactions to which each of the Company and the Subsidiaries is a party or by
which its properties are bound are recorded as necessary to permit preparation
of the financial statements of the Company in accordance with GAAP.
EE. PAYMENTS AND CONTRIBUTIONS. Neither the Company nor
any of its Subsidiaries nor any of their respective directors, officers or, to
their respective knowledge, other employees has (i) used any company funds for
any unlawful contribution, endorsement, gift, entertainment or other unlawful
expense relating to political activity; (ii) made any direct or indirect
unlawful payment of company funds to any foreign or domestic government official
or employee, (iii) violated or is in violation of any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or (iv) made any bribe, rebate,
payoff, influence payment, kickback or other similar payment to any person with
respect to the company matters.
FF. NO MISREPRESENTATION. No representation or warranty of
the Company contained in this Agreement, any schedule, annex or exhibit hereto
or any agreement, instrument or certificate furnished by the Company to Buyer
pursuant to this Agreement, contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, not misleading.
GG. FINDER'S FEE. There are no finder's fee, brokerage
commission or like payment in connection with the transactions contemplated by
this Agreement for which Buyer is liable or responsible.
IV. CERTAIN COVENANTS AND ACKNOWLEDGMENTS
A. RESTRICTIVE LEGEND. Buyer acknowledges and agrees
that, upon issuance pursuant to this Agreement, the Securities (including
without limitation any Dividend Shares, Conversion Shares or Warrant Shares)
shall have endorsed thereon a legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the Preferred Shares, the
Warrant Shares and the Conversion Shares until such legend has been removed):
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
TO AN AVAILABLE EXEMPTION
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<PAGE> 18
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER
LAWS."
B. FILINGS. The Company shall make all necessary
Commission Filings and "blue sky" filings required to be made by the Company in
connection with the sale of the Securities to Buyer as required by all
applicable Laws, and shall provide a copy thereof to Buyer promptly after such
filing.
C. REPORTING STATUS. So long as Buyer beneficially owns
any of the Securities, the Company shall timely file all reports required to be
filed by it with the Commission pursuant to Section 13 or 15(d) of the Exchange
Act.
D. USE OF PROCEEDS. The Company shall use the net
proceeds from the sale of the Securities (excluding amounts paid by the Company
for Buyer's out-of-pocket costs and expenses, whether or not accounted for or
incurred, in connection with the transactions contemplated by this Agreement
(including the fees and disbursements of Buyer's legal counsel) and excluding
finder's fees in connection with such sale) solely for general corporate and
working capital purposes.
E. LISTING. Except to the extent the Company lists its
Common Stock on the New York Stock Exchange, the Company shall use its best
efforts to maintain its listing of the Common Stock on Nasdaq. If the Common
Stock is delisted from Nasdaq, the Company will use its best efforts to list the
Common Stock on the most liquid national securities exchange or quotation system
that the Common Stock is qualified to be listed on.
F. RESERVED CONVERSION SHARES. The Company at all times
from and after the date hereof shall have such number of shares of Common Stock
duly and validly authorized and reserved for issuance as shall be sufficient for
the conversion, in full of, and the payment of dividends on, the 500 Preferred
Shares and the exercise in full of the Warrants.
G. INFORMATION. Each of the parties hereto acknowledges
and agrees that Buyer shall not be provided with, nor be given access to, any
material non-public information relating to the Company and the Subsidiaries.
H. EXEMPTION FROM INVESTMENT COMPANY ACT. The Company
shall conduct its business, and shall cause the Subsidiaries to conduct their
businesses, in a manner so that neither the Company nor any Subsidiary shall
become an "investment company" within the meaning of the Investment Company Act.
I. ACCOUNTING AND RESERVES. The Company shall maintain a
standard and uniform system of accounting and shall keep proper books and
records and accounts in which full, true and correct entries shall be made of
its transactions, all in accordance with GAAP applied on a consistent basis
through all periods, and shall set aside on such books for each fiscal year all
such proper reserves for depreciation, obsolescence, amortization, bad debts and
other purposes in connection with its operations as are required by such
principles so applied.
J. TRANSACTIONS WITH AFFILIATES. Neither the Company nor
any of its Subsidiaries shall, directly or indirectly, enter into any
transaction or agreement with any
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stockholder, officer director or Affiliate of the Company or family member of
any officer, director or Affiliate of the Company, unless the transaction or
agreement is (i) reviewed and approved by a majority of Disinterested Directors
(as defined below) and (ii) on terms no less favorable to the Company or the
applicable Subsidiary than those obtainable from a non-affiliated person. A
"DISINTERESTED DIRECTOR" shall mean an individual who is not and who has not
been an officer or employee of the Company and who is not a member of the family
of, controlled by or under common control with, any such officer or employee.
K. CERTAIN RESTRICTIONS. So long as any Preferred Shares
are outstanding, no dividends shall be declared or paid or set apart for payment
or other distribution declared or made upon Junior Securities (as defined in the
Certificate of Designation), nor shall any Junior Securities be redeemed,
purchased or otherwise acquired (other than a redemption, purchase or other
acquisition of shares of Common Stock made for purposes of an employee incentive
or benefit plan (including a stock option plan) of the Company or any
Subsidiary, for any consideration (or any moneys be paid to or made available
for a sinking fund for the redemption of any shares of any such stock) by the
Company, directly or indirectly.
V. TRANSFER AGENT INSTRUCTIONS
A. The Company undertakes and agrees that no instruction
other than the instructions referred to in this Section V and customary stop
transfer instructions prior to the registration and sale of the Common Stock
pursuant to an effective Securities Act registration statement will be given to
its transfer agent for the Common Stock and that the Conversion Shares, the
Dividend Shares and the Warrant Shares otherwise shall be freely transferable on
the books and records of the Company as and to the extent provided in this
Agreement, the Registration Rights Agreement and applicable law. Nothing
contained in this Section V.A. shall affect in any way Buyer's obligations and
agreement to comply with all applicable securities laws upon resale of such
Common Stock. If, at any time, Buyer provides the Company with an opinion of
counsel reasonably satisfactory to the Company that registration of the resale
by Buyer of such Common Stock is not required under the Securities Act and that
the removal of restrictive legends is permitted under applicable law, the
Company shall permit the transfer of such Common Stock and, promptly instruct
the Company's transfer agent to issue one or more certificates for Common Stock
without any restrictive legends endorsed thereon.
B. Buyer shall have the right to convert the Preferred
Shares by telecopying an executed and completed Notice of Conversion (as defined
in the Certificate of Designation) to the Company. Each date on which a Notice
of Conversion is telecopied to and received by the Company in accordance with
the provisions hereof shall be deemed a Conversion Date (as defined in the
Certificate of Designation). The Company shall transmit the certificates
evidencing the shares of Common Stock issuable upon conversion of any Preferred
Shares (together with certificates evidencing any Preferred Shares not being so
converted) to Buyer via express courier, by electronic transfer or otherwise,
within five business days after receipt by the Company of the Notice of
Conversion (the "DELIVERY DATE"). Within 15 days after Buyer delivers the Notice
of Conversion to the Company, Buyer shall deliver to the Company the Preferred
Shares being converted.
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<PAGE> 20
C. Buyer shall have the right to purchase shares of
Common Stock pursuant to exercise of the Warrants in accordance with its
applicable terms of the Warrants. The last date that the Company may deliver
shares of Common Stock issuable upon any exercise of Warrants is referred to
herein as the "WARRANT DELIVERY DATE."
D. The Company understands that a delay in the issuance
of the shares of Common Stock issuable in lieu of cash dividends on the
Preferred Shares, upon the conversion of the Preferred Shares or exercise of the
Warrants beyond the applicable Dividend Payment Due Date (as defined in the
Certificate of Designation), Delivery Date or Warrant Delivery Date could result
in economic loss to Buyer. As compensation to Buyer for such loss (and not as a
penalty), the Company agrees to pay to Buyer for late issuance of Common Stock
issuable in lieu of cash dividends on the Preferred Shares, upon conversion of
the Preferred Shares or exercise of the Warrants in accordance with the
following schedule (where "NO. BUSINESS DAYS" is defined as the number of
business days beyond five business days from the Dividend Payment Due Date, the
Delivery Date or the Warrant Delivery Date, as applicable):
<TABLE>
<CAPTION>
COMPENSATION FOR EACH 10 SHARES
OF PREFERRED SHARES NOT CONVERTED
TIMELY OR 500 SHARES OF COMMON
STOCK ISSUABLE IN PAYMENT OF
DIVIDENDS OR UPON EXERCISE OF
NO. BUSINESS DAYS WARRANTS NOT ISSUED TIMELY
- ------------------------- -----------------------------------
<S> <C>
1 $ 25
2 50
3 75
4 100
5 125
6 150
7 175
8 200
9 225
10 250
more than 10
$250 + $100 for
each Business Day Late beyond 10 days
</TABLE>
The Company shall pay to Buyer the compensation described above by the transfer
of immediately available funds upon Buyer's demand. Nothing herein shall limit
Buyer's right to pursue actual damages for the Company's failure to issue and
deliver Common Stock to Buyer, and in addition to any other remedies which may
be available to Buyer, in the event the Company fails for any reason to effect
delivery of such shares of Common Stock within five business days after the
relevant Dividend Payment Due Date, the Delivery Date or the Warrant Delivery
Date, as applicable, Buyer shall be entitled to rescind the relevant Notice of
Conversion or exercise of Warrants by delivering a notice to such effect to the
Company whereupon the Company and Buyer shall each be restored to their
respective original positions immediately prior to delivery of such Notice of
Conversion on delivery.
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<PAGE> 21
VI. DELIVERY INSTRUCTIONS
The Securities shall be delivered by the Company to the Escrow
Agent pursuant to Section I.B. hereof on a "delivery-against-payment basis" at
the Closing.
VII. CLOSING DATE
The date and time (the "CLOSING DATE") of the issuance and
sale of the Preferred Shares and the Warrants shall be the date hereof or such
other date and time as shall be mutually agreed upon in writing. The issuance
and sale of the Securities shall occur on the Closing Date at the offices of the
Escrow Agent. Notwithstanding anything to the contrary contained herein, the
Escrow Agent shall not be authorized to release to the Company the Purchase
Price and to Buyer the certificate(s) (I/N/O Buyer or I/N/O Buyer's nominee)
evidencing the Securities being purchased by Buyer unless the conditions set
forth in Section VIII.C. and IX.G. hereof have been satisfied.
VIII. CONDITIONS TO THE COMPANY'S OBLIGATIONS
Buyer understands that the Company's obligation to sell the
Securities on the Closing Date to Buyer pursuant to this Agreement is
conditioned upon:
A. Delivery by Buyer to the Escrow Agent of the Purchase
Price;
B. The accuracy in all material respects on the Closing
Date of the representations and warranties of Buyer contained in this Agreement
as if made on the Closing Date (except for representations and warranties which,
by their express terms, speak as of and relate to a specified date, in which
case such accuracy shall be measured as of such specified date) and the
performance by Buyer in all material respects on or before the Closing Date of
all covenants and agreements of Buyer required to be performed by it pursuant to
this Agreement on or before the Closing Date; and
C. There shall not be in effect any Law or order, ruling,
judgment or writ of any court or public or governmental authority restraining,
enjoining or otherwise prohibiting any of the transactions contemplated by this
Agreement.
IX. CONDITIONS TO BUYER'S OBLIGATIONS
The Company understands that Buyer's obligation to purchase
the Securities on the Closing Date pursuant to this Agreement is conditioned
upon:
A. Delivery by the Company to Buyer of evidence that the
Certificate of Designation has been filed and is effective.
B. Delivery by the Company to the Escrow Agent of one or
more certificates (I/N/O Buyer or I/N/O Buyer's nominee) evidencing the
Securities to be purchased by Buyer pursuant to this Agreement;
21
<PAGE> 22
C. The accuracy in all material respects on the Closing
Date of the representations and warranties of the Company contained in this
Agreement as if made on the Closing Date (except for representations and
warranties which, by their express terms, speak as of and relate to a specified
date, in which case such accuracy shall be measured as of such specified date)
and the performance by the Company in all respects on or before the Closing Date
of all covenants and agreements of the Company required to be performed by it
pursuant to this Agreement on or before the Closing Date, all of which shall be
confirmed to Buyer by the chief executive officer of the Company by delivery of
the certificate to that effect;
D. Buyer having received an opinion of counsel for the
Company, dated the Closing Date, in form, scope and substance reasonably
satisfactory to Buyer as to the matters set forth in Annex A;
E. There not having occurred (i) any general suspension
of trading in, or limitation on prices listed for, the Common Stock on Nasdaq,
(ii) the declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States, (iii) the commencement of a war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States or any of its territories, protectorates or
possessions, or (iv) in the case of the foregoing existing at the date of this
Agreement, a material acceleration or worsening thereof;
F. There not having occurred any event or development,
and there being in existence no condition, having or which reasonably and
foreseeably could have a Material Adverse Effect;
G. The Company shall have delivered to Buyer (as provided
in the Escrow Instructions) reimbursement of Buyer's out-of-pocket costs and
expenses whether or not accounted for or incurred in connection with the
transactions contemplated by this Agreement (including the fees and
disbursements of Buyer's legal counsel) of $50,000;
H. There shall not be in effect any Law or order, ruling,
judgment or writ of any court or public or governmental authority restraining,
enjoining or otherwise prohibiting any of the transactions contemplated by this
Agreement;
I. Delivery of irrevocable instructions to the Company's
transfer agent to reserve 1,500,000 shares of Common Stock for issuance of the
Conversion Shares, the Dividend Shares and the Warrant Shares;
J. Except as set forth on Schedule III.F. hereof, the
Company shall have obtained all consents, approvals or waivers from governmental
authorities and third persons necessary for the execution, delivery and
performance of this Agreement and the other Documents and the transactions
contemplated hereby and thereby, all without material cost to the Company; and
K. Buyer shall have received such additional documents,
certificates, payment, assignments, transfers and other delivers, as it or its
legal counsel may reasonably request and as are customary to effect a closing of
the matters herein contemplated.
22
<PAGE> 23
X. TERMINATION
A. TERMINATION BY MUTUAL WRITTEN CONSENT. This Agreement
may be terminated and the transactions contemplated hereby may be abandoned, for
any reason and at any time prior to the Closing Date, by the mutual written
consent of the Company and Buyer.
B. TERMINATION BY THE COMPANY OR BUYER. This Agreement
may be terminated and the transactions contemplated hereby may be abandoned by
action of the Company or Buyer if (i) the Closing shall not have occurred at or
prior to 5:00 p.m., New York City time, on October 13, 1999 (the "LATEST CLOSING
DATE"); provided, however, that the right to terminate this Agreement pursuant
to this Section X.B. shall not be available to any party whose failure to
fulfill any of its obligations under this Agreement has been the cause of or
resulted in the failure of the Closing to occur at or before such time and date;
provided, further, however, that if the Closing shall not have occurred on or
prior to the Latest Closing Date, the Closing may only occur after the Latest
Closing Date with the written consent of Buyer.
C. TERMINATION BY BUYER. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned by Buyer at any time
prior to the Closing Date, if (i) the Company shall have failed to comply with
any of its covenants or agreements contained in this Agreement, (ii) there shall
have been a breach by the Company with respect to any representation or warranty
made by it in this Agreement, (iii) there shall have occurred any event or
development, or there shall be in existence any condition, having or reasonably
likely to have a Material Adverse Effect or (iv) the Company shall have failed
to satisfy the conditions provided in Section IX hereof.
D. TERMINATION BY THE COMPANY. This Agreement may be
terminated and the transactions contemplated hereby may be abandoned by the
Company at any time prior to the Closing Date, if (i) Buyer shall have failed to
comply with any of its covenants or agreements contained in this Agreement or
(ii) there shall have been a breach by Buyer with respect to any representation
or warranty made by it in this Agreement.
E. EFFECT OF TERMINATION. In the event of the termination
of this Agreement pursuant to this Section X, this Agreement shall thereafter
become void and have no effect, and no party hereto shall have any liability or
obligation to any other party hereto in respect of this Agreement, except that
the provisions of Article XI, this Section X.E. and Section X.F. shall survive
any such termination; provided, however, that no party shall be released from
any liability hereunder if this Agreement is terminated and the transactions
contemplated hereby abandoned by reason of (i) willful failure of such party to
perform its obligations hereunder or (ii) any misrepresentation made by such
party of any matter set forth herein.
F. FEES AND EXPENSES OF TERMINATION. If this Agreement is
terminated for any reason, the Company shall promptly reimburse Buyer for all of
Buyer's out-of-pocket costs and expenses incurred in connection with the
transactions contemplated by this Agreement and the other Documents (including,
without limitation, the fees and disbursements of Buyer's legal counsel).
23
<PAGE> 24
XI. SURVIVAL; INDEMNIFICATION
A. The representations, warranties and covenants made by
each of the Company and Buyer in this Agreement, the annexes, schedules and
exhibits hereto and in each instrument, agreement and certificate entered into
and delivered by them pursuant to this Agreement, shall survive the Closing and
the consummation of the transactions contemplated hereby. In the event of a
breach or violation of any of such representations, warranties or covenants, the
party to whom such representations, warranties or covenants have been made shall
have all rights and remedies for such breach or violation available to it under
the provisions of this Agreement or otherwise, whether at law or in equity,
irrespective of any investigation made by or on behalf of such party on or prior
to the Closing Date.
B. The Company hereby agrees to indemnify and hold
harmless Buyer, its Affiliates and their respective officers, directors,
partners and members (collectively, the "BUYER INDEMNITEES"), from and against
any and all losses, claims, damages, judgments, penalties, liabilities and
deficiencies (collectively, "LOSSES"), and agrees to reimburse Buyer Indemnitees
for all out of-pocket expenses (including the fees and expenses of legal
counsel), in each case promptly as incurred by Buyer Indemnitees and to the
extent arising out of or in connection with:
1. any misrepresentation, omission of fact or
breach of any of the Company's representations or warranties
contained in this Agreement or the other Documents, or the annexes,
schedules or exhibits hereto or thereto or any instrument,
agreement or certificate entered into or delivered by the Company
pursuant to this Agreement or the other Documents;
2. the purchase of the Preferred Shares and the
Warrants, the conversion of the Preferred Shares and the exercise
of the Warrants and the consummation of the transactions
contemplated by this Agreement and the other Documents, the use of
any of the proceeds of the Purchase Price by the Company, the
purchase or ownership of any or all of the Securities, the
performance by the parties hereto of their respective obligations
hereunder and under the Documents or any claim, litigation,
investigation, proceedings or governmental action relating to any
of the foregoing, whether or not Buyer is a party thereto; and
3. resales of the Common Shares by Buyer in the
manner and as contemplated by this Agreement and the Registration
Rights Agreement.
C. Buyer hereby agrees to indemnify and hold harmless the
Company, its Affiliates and their respective officers, directors, partners and
members (collectively, the "COMPANY INDEMNITEES"), from and against any and all
Losses, and agrees to reimburse the Company Indemnitees for all out-of-pocket
expenses (including the fees and expenses of legal counsel), in each case
promptly as incurred by the Company Indemnitees and to the extent arising out of
or in connection with:
1. any misrepresentation, omission of fact, or
breach of any of Buyer's representations or warranties contained in
this Agreement or the other Documents, or the annexes, schedules or
exhibits hereto or thereto or any instrument,
24
<PAGE> 25
agreement or certificate entered into or delivered by Buyer
pursuant to this Agreement or the other Documents; and
2. any failure by Buyer to perform in any material
respect any of its covenants, agreements, undertakings or
obligations set forth in this Agreement or the other Documents or
any instrument, certificate or agreement entered into or delivered
by Buyer pursuant to this Agreement or the other Documents.
D. Promptly after receipt by either party hereto seeking
indemnification pursuant to this Section XI (an "INDEMNIFIED PARTY") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "CLAIM"), the Indemnified Party
promptly shall notify the party against whom indemnification pursuant to this
Section XI is being sought (the "INDEMNIFYING PARTY") of the commencement
thereof; but the omission to so notify the Indemnifying Party shall not relieve
it from any liability that it otherwise may have to the Indemnified Party except
to the extent that the Indemnifying Party is materially prejudiced and forfeits
substantive rights and defenses by reason of such failure. In connection with
any Claim as to which both the Indemnifying Party and the Indemnified Party are
parties, the Indemnifying Party shall be entitled to assume the defense thereof.
Notwithstanding the assumption of the defense of any Claim by the Indemnifying
Party, the Indemnified Party shall have the right to employ separate legal
counsel and to participate in the defense of such Claim, and the Indemnifying
Party shall bear the reasonable fees, out-of-pocket costs and expenses of such
separate legal counsel to the Indemnified Party if (and only if): (x) the
Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and
expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall
have concluded that representation of the Indemnified Party and the Indemnifying
Party by the same legal counsel would not be appropriate due to actual or, as
reasonably determined by legal counsel to the Indemnified Party, potentially
differing interests between such parties in the conduct of the defense of such
Claim, or if there may be legal defenses available to the Indemnified Party that
are in addition to or disparate from those available to the Indemnifying Party,
or (z) the Indemnifying Party shall have failed to employ legal counsel
reasonably satisfactory to the Indemnified Party within a reasonable period of
time after notice of the commencement of such Claim. If the Indemnified Party
employs separate legal counsel in circumstances other than as described in
clauses (x), (y) or (z) above, the fees, costs and expenses of such legal
counsel shall be borne exclusively by the Indemnified Party. Except as provided
above, the Indemnifying Party shall not, in connection with any Claim in the
same jurisdiction, be liable for the fees and expenses of more than one firm of
legal counsel for the Indemnified Party (together with appropriate local
counsel). The Indemnifying Party shall not, without the prior written consent of
the Indemnified Party (which consent shall not unreasonably be withheld), settle
or compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnified Party from all liabilities
with respect to such Claim or judgment.
E. In the event one party hereunder should have a claim
for indemnification that does not involve a claim or demand being asserted by a
third party, the Indemnified Party promptly shall deliver notice of such claim
to the Indemnifying Party. If the Indemnified Party disputes the claim, such
dispute shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the
25
<PAGE> 26
procedures and rules of the American Arbitration Association. Judgment upon any
award rendered by any arbitrators may be entered in any court having competent
jurisdiction thereof.
XII. GOVERNING LAW
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of New York, without regard to the conflicts of law
principles of such state.
XIII. SUBMISSION TO JURISDICTION
Each of the parties hereto consents to the exclusive jurisdiction of
the federal courts whose districts encompass any part of the City of New York or
the state courts of the State of New York sitting in the City of New York in
connection with any dispute arising under this Agreement and the other
Documents. Each party hereto hereby irrevocably and unconditionally waives, to
the fullest extent it may effectively do so, any defense of an inconvenient
forum or improper venue to the maintenance of such action or proceeding in any
such court and any right of jurisdiction on account of its place of residence or
domicile. Each party hereto irrevocably and unconditionally consents to the
service of any and all process in any such action or proceeding in such courts
by the mailing of copies of such process by certified or registered airmail at
its address specified in Section XIX. Each party hereto agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.
XIV. WAIVER OF JURY TRIAL
TO THE FULLEST EXTENT PERMITTED BY LAW, EACH OF THE PARTIES HERETO
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ITS RESPECTIVE RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY OTHER DOCUMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE
SUBJECT MATTER OF THIS AGREEMENT AND OTHER DOCUMENTS. EACH PARTY HERETO (I)
CERTIFIES THAT NEITHER OF THEIR RESPECTIVE REPRESENTATIVES, AGENTS OR ATTORNEYS
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH PARTY WOULD NOT, IN THE EVENT
OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (II) ACKNOWLEDGES THAT
IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE
MUTUAL WAIVERS AND CERTIFICATIONS HEREIN.
XV. COUNTERPARTS; EXECUTION
This Agreement may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all the counterparts shall
together constitute one and the same instrument. A facsimile transmission of
this signed Agreement shall be legal and binding on all parties hereto.
26
<PAGE> 27
XVI. HEADINGS
The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.
XVII. SEVERABILITY
In the event any one or more of the provisions contained in this
Agreement or in the other Documents should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein or therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good-faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which comes as close as possible to that
of the invalid, illegal or unenforceable provisions.
XVIII. ENTIRE AGREEMENT; REMEDIES, AMENDMENTS AND WAIVERS
This Agreement and the Documents constitute the entire agreement among
the parties pertaining to the subject matter hereof and supersedes all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties. No supplement, modification or waiver of this Agreement
shall be binding unless executed in writing by all parties. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
XIX. NOTICES
Except as may be otherwise provided herein, any notice or other
communication or delivery required or permitted hereunder shall be in writing
and shall be delivered personally or sent by certified mail, postage prepaid, or
by a nationally recognized overnight courier service, and shall be deemed given
when so delivered personally or by overnight courier service, or, if mailed,
three (3) days after the date of deposit in the United States mails, as follows:
27
<PAGE> 28
A. to the Company, to:
Innovative Gaming Corporation of America
4725 Aircenter Circle
Reno, Nevada 89502
Attention: Edward G. Stevenson, CEO
(775) 823-3000
(775) 823-3030 (Fax)
with a copy to:
Maslon Edelman Borman & Brand, LLP
3300 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attention: Douglas T. Holod, Esq.
(612) 672-8200
(612) 672-8397 (Fax)
B. if to Buyer, to:
The Shaar Fund Ltd.
c/o Levinson Capital Management
2 World Trade Center, Suite 1820
New York, NY 10048
Attention: Samuel Levinson
(212) 432-7711
(212) 432-7771 (Fax)
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555
(212) 504-5557 (Fax)
C. if to the Escrow Agent, to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555
(212) 504-5557 (Fax)
28
<PAGE> 29
The Company, Buyer or the Escrow Agent may change the foregoing address by
notice given pursuant to this Section XIII.
XX. CONFIDENTIALITY
Each of the Company and Buyer agrees to keep confidential and not to
disclose to or use for the benefit of any third party the terms of this
Agreement or any other information which at any time is communicated by the
other party as being confidential without the prior written approval of the
other party; provided, however, that this provision shall not apply to
information which, at the time of disclosure, is already part of the public
domain (except by breach of this Agreement) and information which is required to
be disclosed by law (including, without limitation, pursuant to Item 601(b)(10)
of Regulation S-K under the Securities Act and the Exchange Act).
XXI. ASSIGNMENT
This Agreement shall not be assignable by either of the parties hereto
prior to the Closing without the prior written consent of the other party, and
any attempted assignment contrary to the provisions hereby shall be null and
void; provided, however, that Buyer may assign its rights and obligations
hereunder, in whole or in part, to any affiliate of Buyer.
SIGNATURE PAGE FOLLOWS
29
<PAGE> 30
In Witness Whereof, the parties hereto have duly executed and
delivered this Agreement on the date first above written.
INNOVATIVE GAMING CORPORATION OF AMERICA
By: s/ Edward G. Stevenson
-----------------------------------------
Name: Edward G. Stevenson
Title: Chief Executive Officer
THE SHAAR FUND LTD.
By: s/ Samuel Levinson
-----------------------------------------
Name: Samuel Levinson
Title: Managing Director
30
<PAGE> 31
EXHIBIT A
COMMON STOCK PURCHASE WARRANTS
<PAGE> 32
EXHIBIT B
CERTIFICATE OF DESIGNATION
<PAGE> 33
EXHIBIT C
ESCROW INSTRUCTIONS
<PAGE> 34
EXHIBIT D
REGISTRATION RIGHTS AGREEMENT
<PAGE> 35
SCHEDULE III.A.3.
PREEMPTIVE, SUBSCRIPTION, "CALL" OR SIMILAR RIGHTS
None.
<PAGE> 36
SCHEDULE III.A.4.
SUBSIDIARIES
Innovative Gaming, Inc., a Nevada corporation.
<PAGE> 37
SCHEDULE III.A.5.
MINUTES
September 15, 1999 Board Minutes being drafted.
September 22, 1999 Board Minutes being drafted.
<PAGE> 38
SCHEDULE III.C.
AUTHORIZED SHARES
See attached.
<PAGE> 39
SCHEDULE III.F.
NON-CONTRAVENTION
None.
<PAGE> 40
SCHEDULE III.G.
APPROVALS
The Registration Statement relating to the Conversion Shares and Warrant Shares
must be approved by the Securities Exchange Commission and the Nevada Gaming
Commission.
<PAGE> 41
SCHEDULE III.K.
LITIGATION
None.
<PAGE> 42
SCHEDULE III.L.
EVENTS OF DEFAULT
None.
<PAGE> 43
SCHEDULE III.O.
RELATED PARTY TRANSACTIONS
None.
<PAGE> 44
SCHEDULE III.Q.
SECURITIES LAW MATTERS
See Schedule III.C.
<PAGE> 45
SCHEDULE III.R.
ENVIRONMENTAL MATTERS
None.
<PAGE> 46
SCHEDULE III.T.
ERISA MATTERS
The Company's 401-K Plan.
The Company's Premium Only Plan for Health Insurance.
<PAGE> 47
SCHEDULE III.V.
PROPERTY
See attached.
<PAGE> 48
SCHEDULE III.W.
INTELLECTUAL PROPERTY
See attached.
<PAGE> 49
SCHEDULE III.Y.
REGISTRATION RIGHTS
The Convertible Notes indicated on Schedule III.C. have demand and "piggy-back"
registration rights.
<PAGE> 50
ANNEX A
FORM OF OPINION
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Minnesota, is duly
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions where the Company owns or leases properties or conducts business,
except for jurisdictions in which the failure to so qualify would not have a
Material Adverse Effect, and has all requisite corporate power and authority to
own its properties and conduct its business as described in the Commission
Filings.
2. The authorized capital stock of the Company consists solely of
100,000,000 shares of capital stock, of which (i) 7,501,648 shares of common
stock are issued and outstanding on the date hereof (ii) 4,000 shares have been
designated Series B Convertible Preferred Stock, par value $0.01 per share, of
which 825 shares are issued and outstanding on the date hereof and (iii) $2,000
shares have been designated Series C Cumulative Convertible Preferred Stock, par
value $0.01 per share, of which 1,400 shares are issued and outstanding on the
date hereof. All of the issued and outstanding shares of Common Stock and
preferred stock, if any, have been duly authorized and validly issued and are
fully paid and nonassessable. As of the date hereof, the Company has outstanding
stock options to purchase 978,000 shares of Common Stock and outstanding
warrants to purchase 1,250,000 shares of Common Stock.
3. When delivered to you or upon your order against payment of the
agreed consideration therefor in accordance with the provisions of the
Documents, the Securities will be duly authorized and validly issued, fully paid
and nonassessable.
4. The Company has the requisite corporate power and authority to
enter into the Documents and to sell and deliver the Securities as described in
the Documents; each of the Documents has been duly and validly authorized by all
necessary corporate action by the Company; each of the Documents has been duly
and validly executed and delivered by and on behalf of the Company, and is valid
and binding agreement of the Company, enforceable in accordance with its terms,
except as enforceability may be limited by general equitable principles,
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other laws affecting creditors rights generally.
5. The executive, delivery and performance of the Documents by the
Company and the performance of its obligations thereunder do not and will not
constitute a breach or violation of any of the terms and provisions of, or
constitute a default (or with notice, lapse of time or both would constitute a
default) under or conflict with or violate any provision of (i) the Company's
certificate of incorporation or bylaws, (ii) any indenture, mortgage, deed of
trust, agreement or other instrument known to us to which the Company is a party
or by which it or any of its property is bound, (iii) or, to the best of our
knowledge, any judgment, decree or order of any court or governmental body
having jurisdiction over the Company or any of its property. To the best of our
knowledge, no consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or any of its properties or assets
A-1
<PAGE> 51
is required for the execution, delivery and performance by the Company of the
Documents or the consummation by the Company of the transactions contemplated
thereby.
6. When issued, the Preferred Shares and the Warrants shall be duly
authorized, validly issued, fully paid and nonassessable, and free and clear of
all encumbrances and restrictions, except for restrictions on transfer imposed
by applicable securities laws. The Conversion Shares and Warrant Shares issuable
upon conversion or exercise, respectively, of the Preferred Shares and the
Warrants, respectively, will be duly authorized, validly issued, fully paid and
nonassessable, and free and clear of all encumbrances and restrictions, except
for restrictions on transfer imposed by applicable securities laws.
7. Based on Buyer's representations contained in this Agreement, the
offer and sale of the Preferred Shares and the Warrants are exempt from the
registration requirements of the Securities Act.
8. To the best of our knowledge, other than as described in the
Commission Filings, there are no outstanding options, warrants or other
securities exercisable or convertible into Common Stock of the Company.
9. There is no action, suit, claim, inquiry or investigation pending
or, to the best of our knowledge, threatened by or before any court or public or
governmental authority which, if determined adversely to the Company, would have
a Material Adverse Effect.
10. Neither the Company nor any of its subsidiaries is, or will be
after the consummation of the transactions contemplated by this Agreement and
the other Documents and the use of the proceeds from the sale of the Securities,
an "investment company" or an entity "controlled" by an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.
A-2
<PAGE> 1
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of October 13, 1999 (this
"AGREEMENT"), between Innovative Gaming Corporation of America, a Minnesota
corporation, with principal executive offices located at 4725 Aircenter Circle,
Reno, Nevada 89502 (the "COMPANY"), and The Shaar Fund Ltd. (the "INITIAL
INVESTOR").
WHEREAS, upon the terms and subject to the conditions of the
Securities Purchase Agreement dated as of October 13, 1999, between the Initial
Investor and the Company (the "SECURITIES PURCHASE AGREEMENT"), the Company has
agreed to issue and sell to the Initial Investor (i) 500 shares of its Series D
6% Convertible Preferred Stock, par value $0.01 per share (the "PREFERRED
SHARES") which, upon the terms of and subject to the conditions of the Company's
Certificate of Designation of Series D 6% Convertible Preferred Stock (the
"CERTIFICATE OF DESIGNATION"), are convertible into shares of the Company's
common stock, par value $0.01 per share (the "COMMON STOCK") and (ii) Common
Stock Purchase Warrants (the "WARRANTS") to purchase shares of Common Stock; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide with respect to
the Common Stock issued or issuable in lieu of cash dividend payments on the
Preferred Shares, upon conversion of the Preferred Shares and exercise of the
Warrants certain registration rights under the Securities Act;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. DEFINITIONS
(a) As used in this Agreement, the following terms shall have the
meanings:
(i) "AFFILIATE," of any specified Person means any other Person
who directly, or indirectly through one or more intermediaries, is in
control of, is controlled by, or is under common control with, such
specified Person. For purposes of this definition, control of a Person
means the power, directly or indirectly, to direct or cause the direction
of the management and policies of such Person whether by contract,
securities, ownership or otherwise; and the terms "CONTROLLING" and
"CONTROLLED" have the respective meanings correlative to the foregoing.
(ii) "ASSIGNMENT AGREEMENT" means that certain Series B
Convertible Preferred Stock Assignment Agreement, dated as of June 1, 1999,
by and between the Company and Shaar, as the same may be amended and in
effect from time to time.
<PAGE> 2
(ii) "CLOSING DATE" means the date and time of the issuance and
sale of the Preferred Shares and the Warrants.
(iii) "COMMISSION" means the Securities and Exchange Commission.
(iv) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission thereunder, or
any similar successor statute.
(v) "INVESTOR" means each of the Initial Investor and any
transferee or assignee of Registrable Securities which agrees to become
bound by all of the terms and provisions of this Agreement in accordance
with Section 8 hereof.
(vi) "PERSON" means any individual, partnership, corporation,
limited liability company, joint stock company, association, trust,
unincorporated organization, or a government or agency or political
subdivision thereof.
(vii) "PROSPECTUS" means the prospectus (including, without
limitation, any preliminary prospectus and any final prospectus filed
pursuant to Rule 424(b) under the Securities Act, including any prospectus
that discloses information previously omitted from a prospectus filed as
part of an effective registration statement in reliance on Rule 430A under
the Securities Act) included in the Registration Statement, as amended or
supplemented by any prospectus supplement with respect to the terms of the
offering of any portion of the Registrable Securities covered by the
Registration Statement and by all other amendments and supplements to such
prospectus, including all material incorporated by reference in such
prospectus and all documents filed after the date of such prospectus by the
Company under the Exchange Act and incorporated by reference therein.
(viii) "PUBLIC OFFERING" means an offer registered with the
Commission and the appropriate state securities commissions by the Company
of its Common Stock and made pursuant to the Securities Act.
(ix) "REGISTRABLE SECURITIES" means the Common Stock issued or
issuable (i) in lieu of cash dividend payments on the Preferred Shares,
(ii) upon conversion or redemption of the Preferred Shares or (iii) upon
exercise of the Warrants; provided, however, a share of Common Stock shall
cease to be a Registrable Security for purposes of this Agreement when it
no longer is a Restricted Security.
(x) "REGISTRATION STATEMENT" means a registration statement of
the Company filed on an appropriate form under the Securities Act providing
for the registration of, and the sale on a continuous or delayed basis by
the holders of, all of the Registrable Securities pursuant to Rule 415
under the Securities Act, including the Prospectus contained therein and
forming a part thereof, any amendments to such registration statement and
supplements to such Prospectus, and all exhibits and other material
incorporated by reference in such registration statement and Prospectus.
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(xi) "RESTRICTED SECURITY" means any share of Common Stock
issued or issuable in lieu of cash dividend payments on the Preferred
Shares, upon conversion or redemption of the Preferred Shares or exercise
of the Warrants except any such share that (i) has been registered pursuant
to an effective registration statement under the Securities Act and sold in
a manner contemplated by the prospectus included in such registration
statement, (ii) has been transferred in compliance with the resale
provisions of Rule 144 under the Securities Act (or any successor provision
thereto) or is transferable pursuant to paragraph (k) of Rule 144 under the
Securities Act (or any successor provision thereto), or (iii) otherwise has
been transferred and a new share of Common Stock not subject to transfer
restrictions under the Securities Act has been delivered by or on behalf of
the Company.
(xii) "SECURITIES ACT" means the Securities Act of 1933, as
amended, and the rules and regulations of the Commission thereunder, or any
similar successor statute.
(xiii) "SERIES B INVESTOR" means each of (a) Shaar as assignee
under the Assignment Agreement, and its permitted successors and assigns
thereunder and (b) any holder from time to time of any shares of the Series
B Convertible Preferred Stock of the Company.
(xiv) "SERIES C INVESTOR" means an "Investor" as defined in the
Series C Registration Rights Agreement.
(xv) "SERIES C REGISTRATION RIGHTS AGREEMENT" means that
certain Series C Registration Rights Agreement dated as of June 1, 1999 by
and between the Company and Shaar, as the same may be amended and in effect
from time to time.
(xvii) "SHAAR" means The Shaar Fund Ltd.
(b) All capitalized terms used and not defined herein have the
respective meaning assigned to them in the Securities Purchase Agreement.
2. REGISTRATION
(a) FILING AND EFFECTIVENESS OF REGISTRATION STATEMENT. The Company
shall prepare and file with the Commission not later than 90 days after the
Closing Date, a Registration Statement on Form S-3 relating to the offer and
resale of the Registrable Securities by the holders thereof and shall use its
best efforts to cause the Commission to declare such Registration Statement
effective under the Securities Act as promptly as practicable but not later than
180 days after the Closing Date, assuming for purposes hereof that an amount of
Registrable Securities of not more than 20% of the Company's issued and
outstanding stock is being registered. The Company shall promptly (and, in any
event, no more than 24 hours after it receives comments from the Commission),
notify the Buyer when and if it receives any comments from the Commission on the
Registration Statement and promptly forward a copy of such comments, if they are
in writing, to the Buyer. At such time after the filing of the Registration
Statement pursuant to this Section 2(a) as (i) the Commission indicates, either
orally or in writing, that it has no further comments with respect to such
Registration Statement or that
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it is willing to entertain appropriate requests for acceleration of
effectiveness of such Registration Statement and (ii) the Company shall have
received all necessary Nevada gaming regulatory approvals, the Company shall
promptly, and in no event later than two business days after receipt of such
indication from the Commission, request that the effectiveness of such
Registration Statement be accelerated within 48 hours of the Commission's
receipt of such request. The Company shall not include any other securities in
the Registration Statement relating to the offer and sale of the Registrable
Securities. The Company shall notify the Initial Investor by written notice that
such Registration Statement has been declared effective by the Commission within
24 hours of such declaration by the Commission.
(b) REGISTRATION DEFAULT. If the Registration Statement covering the
Registrable Securities required to be filed by the Company pursuant to Section
2(a) is not (i) filed with the Commission within 90 days after the Closing Date
or (ii) declared effective by the Commission within 180 days after the Closing
Date (either of which, without duplication, an "INITIAL DATE"), then the Company
shall make the payments to the Initial Investor as provided in the next sentence
as liquidated damages and not as a penalty. The amount to be paid by the Company
to the Initial Investor shall be determined as of each Computation Date (as
defined below), and such amount shall be equal to 2% (the "LIQUIDATED DAMAGE
RATE") of the Purchase Price (as defined in the Securities Purchase Agreement)
from the Initial Date to the first Computation Date and 3.5% for each
Computation Date thereafter, calculated on a pro rata basis to the date on which
the Registration Statement is filed with (in the event of an Initial Date
pursuant to clause (i) above) or declared effective by (in the event of an
Initial Date pursuant to clause (ii) above) the Commission (the "PERIODIC
AMOUNT"). The full Periodic Amount shall be paid by the Company to the Initial
Investor by wire transfer of immediately available funds within three days after
each Computation Date.
As used in this Section 2(b), "COMPUTATION DATE" means the date which
is 30 days after the Initial Date and, if the Registration Statement required to
be filed by the Company pursuant to Section 2(a) has not theretofore been
declared effective by the Commission, each date which is 30 days after the
previous Computation Date until such Registration Statement is so declared
effective.
Notwithstanding the above, if the Registration Statement covering the
Registrable Securities required to be filed by the Company pursuant to Section
2(a) is not filed with the Commission by the 90th day after the Closing Date,
the Company shall be in default of this Registration Rights Agreement.
(c) ELIGIBILITY FOR USE OF FORM S-3. The Company agrees that at such
time as it meets all the requirements for the use of Securities Act Registration
Statement on Form S-3 it shall file all reports and information required to be
filed by it with the Commission in a timely manner and take all such other
action so as to maintain such eligibility for the use of such form.
(d) (i) If the Company proposes to register any of its warrants,
Common Stock or any other shares of common stock of the Company under the
Securities Act (other than a registration (A) on Form S-8 or S-4 or any
successor or similar forms, (B) relating to Common Stock or any other
shares of common stock of the Company issuable upon exercise of employee
share options or in connection with any employee benefit or
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similar plan of the Company or (C) in connection with a direct or indirect
acquisition by the Company of another Person or any transaction with
respect to which Rule 145 (or any successor provision) under the Securities
Act applies), whether or not for sale for its own account, it will each
such time, give prompt written notice at least 20 days prior to the
anticipated filing date of the registration statement relating to such
registration to each Investor, which notice shall set forth such Investor's
rights under this Section 3(e) and shall offer such Investor the
opportunity to include in such registration statement such number of
Registrable Securities as such Investor may request. Upon the written
request of any Investor made within 10 days after the receipt of notice
from the Company (which request shall specify the number of Registrable
Securities intended to be disposed of by such Investor), the Company will
use its best efforts to effect the registration under the Securities Act of
all Registrable Securities that the Company has been so requested to
register by such Investor, to the extent requisite to permit the
disposition of the Registrable Securities so to be registered; provided,
however, that (x) if such registration involves a Public Offering, the
Investors must sell their Registrable Securities to the underwriters
selected by the Company with the consent of each Investor on the same terms
and conditions as apply to the Company and (y) if, at any time after giving
written notice of its intention to register any Registrable Securities
pursuant to this Section 3 and prior to the effective date of the
registration statement filed in connection with such registration, the
Company shall determine for any reason not to register such Registrable
Securities, the Company shall give written notice to each Investor and,
thereupon, shall be relieved of its obligation to register any Registrable
Securities in connection with such registration. The Company's obligations
under this Section 2(e) shall terminate on the date that the registration
statement to be filed in accordance with Section 2(a) is declared effective
by the Commission.
(ii) If a registration pursuant to this Section 2(e) involves a
Public Offering and the managing underwriter thereof advises the Company
that, in its view, the number of shares of Common Stock, Warrants or other
shares of Common Stock that the Company, each Investor and all other
sellers (the "THIRD-PARTY SELLERS") intend to include in such registration
exceeds the largest number of shares of Common Stock or Warrants (including
any other shares of Common Stock or Warrants of the Company) that can be
sold without having an adverse effect on such Public Offering (the "MAXIMUM
OFFERING SIZE"), the Company will include in such registration, only that
number of shares of Common Stock or Warrants, as applicable, such that the
number of shares of Registrable Securities registered does not exceed the
Maximum Offering Size, with the difference between the number of shares in
the Maximum Offering Size and the number of shares to be issued by the
Company to be allocated (after including all shares to be issued and sold
by the Company, the Investors and any Third-Party Sellers) first, among the
Company and the Investors pro rata on the basis of the relative number of
shares of Common Stock or Warrants offered for sale under such registration
by each of the Company and the Investors and, second, to any Third-Party
Sellers. If as a result of the proration provisions of this Section
2(e)(ii), any Investor is not entitled to include all such Registrable
Securities in such registration, such Investor may elect to withdraw its
request to include any Registrable Securities in such registration. With
respect to registrations pursuant to this Section 2(e), the number of
securities required to satisfy any underwriters' over-allotment option
shall be allocated pro rata among the Company, the
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Investors and any Third-Party Sellers on the basis of proration as set
forth in the second sentence preceding.
Notwithstanding anything contained in this Section 2(e) to the
contrary, the rights of any Investor under this Section 2(e) to include
Registrable Securities in any registration statement shall be junior and
subordinate in all respects to the rights granted by the Company in the Series C
Registration Statement to the Series C Investors and the rights assigned to the
Series B Investors in the Assignment Agreement.
3. OBLIGATIONS OF THE COMPANY
In connection with the registration of the Registrable Securities, the
Company shall:
(a) Promptly (i) prepare and file with the Commission such amendments
(including post-effective amendments) to the Registration Statement and
supplements to the Prospectus as may be necessary to keep the Registration
Statement continuously effective and in compliance with the provisions of the
Securities Act applicable thereto so as to permit the Prospectus forming part
thereof to be current and useable by Investors for resales of the Registrable
Securities for a period of two years from the date on which the Registration
Statement is first declared effective by the Commission (the "EFFECTIVE TIME")
or such shorter period that will terminate when all the Registrable Securities
covered by the Registration Statement have been sold pursuant thereto in
accordance with the plan of distribution provided in the Prospectus, transferred
pursuant to Rule 144 under the Securities Act or otherwise transferred in a
manner that results in the delivery of new securities not subject to transfer
restrictions under the Securities Act (the "REGISTRATION PERIOD") and (ii) take
all lawful action such that each of (A) the Registration Statement and any
amendment thereto does not, when it becomes effective, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, not misleading and
(B) the Prospectus forming part of the Registration Statement, and any amendment
or supplement thereto, does not at any time during the Registration Period
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Notwithstanding the foregoing provisions of this Section 3(a), any Class B
Investor or Class C Investor may, by written notice to the Company and each
Investor during the Registration Period, require the Company to suspend the use
of the Prospectus for a period not to exceed 90 days (whether or not
consecutive) in any 12-month period, and if so notified the Company shall
suspend the use of the Prospectus as required by such Class B Investor or Class
C Investor. At the end of any such suspension period, the Company shall provide
the Investors with written notice of the termination of such suspension;
(b) During the Registration Period, comply with the provisions of the
Securities Act with respect to the Registrable Securities of the Company covered
by the Registration Statement until such time as all of such Registrable
Securities have been disposed of in accordance with the intended methods of
disposition by the Investors as set forth in the Prospectus forming part of the
Registration Statement;
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(c) (i) Prior to the filing with the Commission of any Registration
Statement (including any amendments thereto) and the distribution or delivery of
any Prospectus (including any supplements thereto), provide (A) draft copies
thereof to the Investors and reflect in such documents all such comments as the
Investors (and their counsel) reasonably may propose and (B) to the Investors a
copy of the accountant's consent letter to be included in the filing and (ii)
furnish to each Investor whose Registrable Securities are included in the
Registration Statement and its legal counsel identified to the Company, (A)
promptly after the same is prepared and publicly distributed, filed with the
Commission, or received by the Company, one copy of the Registration Statement,
each Prospectus, and each amendment or supplement thereto, and (B) such number
of copies of the Prospectus and all amendments and supplements thereto and such
other documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(d) (i) Register or qualify the Registrable Securities covered by the
Registration Statement under such securities or "blue sky" laws of such
jurisdictions as the Investors who hold a majority-in-interest of the
Registrable Securities being offered reasonably request, (ii) prepare and file
in such jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof at all times during the Registration Period,
(iii) take all such other lawful actions as may be necessary to maintain such
registrations and qualifications in effect at all times during the Registration
Period, and (iv) take all such other lawful actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to (A) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (B) subject itself to general taxation in any such jurisdiction or
(C) file a general consent to service of process in any such jurisdiction;
(e) As promptly as practicable after becoming aware of such event,
notify each Investor of the occurrence of any event, as a result of which the
Prospectus included in the Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and
promptly prepare an amendment to the Registration Statement and supplement to
the Prospectus to correct such untrue statement or omission, and deliver a
number of copies of such supplement and amendment to each Investor as such
Investor may reasonably request;
(f) As promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the Commission of any stop order or other suspension of the effectiveness of the
Registration Statement at the earliest possible time and take all lawful action
to effect the withdrawal, recession or removal of such stop order or other
suspension;
(g) Cause all the Registrable Securities covered by the Registration
Statement to be listed on the principal national securities exchange, and
included in an inter-dealer quotation system of a registered national securities
association, on or in which securities of the same class or series issued by the
Company are then listed or included;
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(h) Maintain a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(i) Cooperate with the Investors who hold Registrable Securities being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Securities to be offered pursuant to the registration statement
and enable such certificates for the Registrable Securities to be in such
denominations or amounts, as the case may be, as the Investors reasonably may
request and registered in such names as the Investor may request; and, within
three business days after a registration statement which includes Registrable
Securities is declared effective by the Commission, deliver and cause legal
counsel selected by the Company to deliver to the transfer agent for the
Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such registration statement) an appropriate
instruction and, to the extent necessary, an opinion of such counsel;
(j) Take all such other lawful actions reasonably necessary to
expedite and facilitate the disposition by the Investors of their Registrable
Securities in accordance with the intended methods therefor provided in the
Prospectus which are customary under the circumstances;
(k) Make generally available to its security holders as soon as
practicable, but in any event not later than three (3) months after (i) the
effective date (as defined in Rule 158(c) under the Securities Act) of the
Registration Statement, and (ii) the effective date of each post-effective
amendment to the Registration Statement, as the case may be, an earnings
statement of the Company and its subsidiaries complying with Section 11(a) of
the Securities Act and the rules and regulations of the Commission thereunder
(including, at the option of the Company, Rule 158);
(l) In the event of an underwritten offering, promptly include or
incorporate in a Prospectus supplement or post-effective amendment to the
Registration Statement such information as the managers reasonably agree should
be included therein and to which the Company does not reasonably object and make
all required filings of such Prospectus supplement or post-effective amendment
as soon as practicable after it is notified of the matters to be included or
incorporated in such Prospectus supplement or post-effective amendment;
(m) (i) Make reasonably available for inspection by Investors, any
underwriter participating in any disposition pursuant to the Registration
Statement, and any attorney, accountant or other agent retained by such
Investors or any such underwriter all relevant financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries, and (ii) cause the Company's officers, directors and employees to
supply all information reasonably requested by such Investors or any such
underwriter, attorney, accountant or agent in connection with the Registration
Statement, in each case, as is customary for similar due diligence examinations;
provided, however, that all records, information and documents that are
designated in writing by the Company, in good faith, as confidential,
proprietary or containing any material nonpublic information shall be kept
confidential by such Investors and any such underwriter, attorney, accountant or
agent (pursuant to an appropriate confidentiality agreement in the case of any
such holder or agent), unless such disclosure is made pursuant to judicial
process in a court proceeding (after first giving the Company an opportunity
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promptly to seek a protective order or otherwise limit the scope of the
information sought to be disclosed) or is required by law, or such records,
information or documents become available to the public generally or through a
third party not in violation of an accompanying obligation of confidentiality;
and provided, further, that, if the foregoing inspection and information
gathering would otherwise disrupt the Company's conduct of its business, such
inspection and information gathering shall, to the maximum extent possible, be
coordinated on behalf of the Investors and the other parties entitled thereto by
one firm of counsel designed by and on behalf of the majority in interest of
Investors and other parties;
(n) In connection with any underwritten offering, make such
representations and warranties to the Investors participating in such
underwritten offering and to the managers, in form, substance and scope as are
customarily made by the Company to underwriters in secondary underwritten
offerings;
(o) In connection with any underwritten offering, obtain opinions of
counsel to the Company (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the managers) addressed to the
underwriters, covering such matters as are customarily covered in opinions
requested in secondary underwritten offerings (it being agreed that the matters
to be covered by such opinions shall include, without limitation, as of the date
of the opinion and as of the Effective Time of the Registration Statement or
most recent post-effective amendment thereto, as the case may be, the absence
from the Registration Statement and the Prospectus, including any documents
incorporated by reference therein, of an untrue statement of a material fact or
the omission of a material fact required to be stated therein or necessary to
make the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading, subject to customary
limitations);
(p) In connection with any underwritten offering, obtain "cold
comfort" letters and updates thereof from the independent public accountants of
the Company (and, if necessary, from the independent public accountants of any
subsidiary of the Company or of any business acquired by the Company, in each
case for which financial statements and financial data are, or are required to
be, included in the Registration Statement), addressed to each underwriter
participating in such underwritten offering (if such underwriter has provided
such letter, representations or documentation, if any, required for such cold
comfort letter to be so addressed), in customary form and covering matters of
the type customarily covered in "cold comfort" letters in connection with
secondary underwritten offerings;
(q) In connection with any underwritten offering, deliver such
documents and certificates as may be reasonably required by the managers, if
any; and
(r) In the event that any broker-dealer registered under the Exchange
Act shall be an "AFFILIATE" (as defined in Rule 2729(b)(1) of the rules and
regulations of the National Association of Securities Dealers, Inc. (the "NASD
RULES") (or any successor provision thereto)) of the Company or has a "CONFLICT
OF INTEREST" (as defined in Rule 2720(b)(7) of the NASD Rules (or any successor
provision thereto)) and such broker-dealer shall underwrite, participate as a
member of an underwriting syndicate or selling group or assist in the
distribution of any Registrable Securities covered by the Registration
Statement, whether as a holder of such Registrable Securities or as an
underwriter, a placement or sales agent or a broker or dealer in
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respect thereof, or otherwise, the Company shall assist such broker-dealer in
complying with the requirements of the NASD Rules, including, without
limitation, by (A) engaging a "QUALIFIED INDEPENDENT UNDERWRITER" (as defined in
Rule 2720(b)(15) of the NASD Rules (or any successor provision thereto)) to
participate in the preparation of the Registration Statement relating to such
Registrable Securities, to exercise usual standards of due diligence in respect
thereof and to recommend the public offering price of such Registrable
Securities, (B) indemnifying such qualified independent underwriter to the
extent of the indemnification of underwriters provided in Section 5 hereof, and
(C) providing such information to such broker-dealer as may be required in order
for such broker-dealer to comply with the requirements of the NASD Rules.
4. OBLIGATIONS OF THE INVESTORS
In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. As least seven
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify each Investor of the information the Company requires
from each such Investor (the "REQUESTED INFORMATION") if such Investor elects to
have any of its Registrable Securities included in the Registration Statement.
If at least two business days prior to the anticipated filing date the Company
has not received the Requested Information from an Investor (a "NON-RESPONSIVE
INVESTOR"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor and have no
further obligations to the Non-Responsive Investor;
(b) Each Investor by its acceptance of the Registrable Securities
agrees to cooperate with the Company in connection with the preparation and
filing of the Registration Statement hereunder, unless such Investor has
notified the Company in writing of its election to exclude all of its
Registrable Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the
Company of the occurrence of any event of the kind described in Section 3(e) or
3(f), it shall immediately discontinue its disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until such Investor's receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 3(e) and, if so directed by the Company, such
Investor shall deliver to the Company (at the expense of the Company) or destroy
(and deliver to the Company a certificate of destruction) all copies in such
Investor's possession, of the Prospectus covering such Registrable Securities
current at the time of receipt of such notice.
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5. EXPENSES OF REGISTRATION
All expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Section 3, but including, without limitation, all registration, listing, and
qualifications fees, printing and engraving fees, accounting fees, and the fees
and disbursements of counsel for the Company.
6. INDEMNIFICATION AND CONTRIBUTION
(a) The Company shall indemnify and hold harmless each Investor and
each underwriter, if any, which facilitates the disposition of Registrable
Securities, and each of their respective officers and directors and each person
who controls such Investor or underwriter within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act (each such person being
sometimes hereinafter referred to as an "INDEMNIFIED PERSON") from and against
any losses, claims, damages or liabilities, joint or several, to which such
Indemnified Person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or an
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, not misleading, or
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in any Prospectus or an omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company hereby agrees to
reimburse such Indemnified Person for all reasonable legal and other expenses
incurred by them in connection with investigating or defending any such action
or claim as and when such expenses are incurred; provided, however, that the
Company shall not be liable to any such Indemnified Person in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon (i) an untrue statement or alleged untrue statement made in, or an
omission or alleged omission from, such Registration Statement or Prospectus in
reliance upon and in conformity with written information furnished to the
Company by such Indemnified Person expressly for use therein or (ii) in the case
of the occurrence of an event of the type specified in Section 3(e), the use by
the Indemnified Person of an outdated or defective Prospectus after the Company
has provided to such Indemnified Person an updated Prospectus correcting the
untrue statement or alleged untrue statement or omission or alleged omission
giving rise to such loss, claim, damage or liability.
(b) INDEMNIFICATION BY THE INVESTORS AND UNDERWRITERS. Each Investor
agrees, as a consequence of the inclusion of any of its Registrable Securities
in a Registration Statement, and each underwriter, if any, which facilitates the
disposition of Registrable Securities shall agree, as a consequence of
facilitating such disposition of Registrable Securities, severally and not
jointly, to (i) indemnify and hold harmless the Company, its directors
(including any person who, with his or her consent, is named in the Registration
Statement as a director nominee of the Company), its officers who sign any
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, against any losses, claims, damages or liabilities to which the
Company or such other persons may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect
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thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in such Registration Statement or
Prospectus or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein (in light of the circumstances under which they were
made, in the case of the Prospectus), not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such holder or
underwriter expressly for use therein; provided, however, that no Investor or
underwriter shall be liable under this Section 6(b) for any amount in excess of
the net proceeds paid to such Investor or underwriter in respect of shares sold
by it, and (ii) reimburse the Company for any legal or other expenses incurred
by the Company in connection with investigating or defending any such action or
claim as such expenses are incurred.
(c) NOTICE OF CLAIMS, ETC. Promptly after receipt by a party seeking
indemnification pursuant to this Section 6 (an "INDEMNIFIED PARTY") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "CLAIM"), the Indemnified Party
promptly shall notify the party against whom indemnification pursuant to this
Section 6 is being sought (the "INDEMNIFYING PARTY") of the commencement
thereof; but the omission to so notify the Indemnifying Party shall not relieve
it from any liability that it otherwise may have to the Indemnified Party,
except to the extent that the Indemnifying Party is materially prejudiced and
forfeits substantive rights and defenses by reason of such failure. In
connection with any Claim as to which both the Indemnifying Party and the
Indemnified Party are parties, the Indemnifying Party shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of any
Claim by the Indemnifying Party, the Indemnified Party shall have the right to
employ separate legal counsel and to participate in the defense of such Claim,
and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (x) the Indemnifying Party shall have agreed to pay such fees, costs
and expenses, (y) the Indemnified Party and the Indemnifying Party shall
reasonably have concluded that representation of the Indemnified Party by the
Indemnifying Party by the same legal counsel would not be appropriate due to
actual or, as reasonably determined by legal counsel to the Indemnified Party,
potentially differing interests between such parties in the conduct of the
defense of such Claim, or if there may be legal defenses available to the
Indemnified Party that are in addition to or disparate from those available to
the Indemnifying Party, or (z) the Indemnifying Party shall have failed to
employ legal counsel reasonably satisfactory to the Indemnified Party within a
reasonable period of time after notice of the commencement of such Claim. If the
Indemnified Party employs separate legal counsel in circumstances other than as
described in clauses (x), (y) or (z) above, the fees, costs and expenses of such
legal counsel shall be borne exclusively by the Indemnified Party. Except as
provided above, the Indemnifying Party shall not, in connection with any Claim
in the same jurisdiction, be liable for the fees and expenses of more than one
firm of counsel for the Indemnified Party (together with appropriate local
counsel). The Indemnified Party shall not, without the prior written consent of
the Indemnifying Party (which consent shall not unreasonably be withheld),
settle or compromise any Claim or consent to the entry of any judgment that does
not include an unconditional release of the Indemnifying Party from all
liabilities with respect to such Claim or judgment.
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<PAGE> 13
(d) CONTRIBUTION. If the indemnification provided for in this Section
6 is unavailable to or insufficient to hold harmless an Indemnified Person under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
Indemnifying Party shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party and the Indemnified Party in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault of such Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
such Indemnifying Party or by such Indemnified Party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 6(d) were determined by
pro rata allocation (even if the Investors or any underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this Section 6(d).
The amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
shall be deemed to include any legal or other fees or expenses reasonably
incurred by such Indemnified Party in connection with investigating or defending
any such action or claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The obligations of the Investors and any underwriters in this
Section 6(d) to contribute shall be several in proportion to the percentage of
Registrable Securities registered or underwritten, as the case may be, by them
and not joint.
(e) Notwithstanding any other provision of this Section 6, in no event
shall any (i) Investor be required to undertake liability to any person under
this Section 6 for any amounts in excess of the dollar amount of the proceeds to
be received by such Investor from the sale of such Investor's Registrable
Securities (after deducting any fees, discounts and commissions applicable
thereto) pursuant to any Registration Statement under which such Registrable
Securities are to be registered under the Securities Act and (ii) underwriter be
required to undertake liability to any Person hereunder for any amounts in
excess of the aggregate discount, commission or other compensation payable to
such underwriter with respect to the Registrable Securities underwritten by it
and distributed pursuant to the Registration Statement.
(f) The obligations of the Company under this Section 6 shall be in
addition to any liability which the Company may otherwise have to any
Indemnified Person and the obligations of any Indemnified Person under this
Section 6 shall be in addition to any liability which such Indemnified Person
may otherwise have to the Company. The remedies provided in this Section 6 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to an indemnified party at law or in equity.
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<PAGE> 14
7. RULE 144
With a view to making available to the Investors the benefits of Rule
144 under the Securities Act or any other similar rule or regulation of the
Commission that may at any time permit the Investors to sell securities of the
Company to the public without registration ("RULE 144"), the Company agrees to
use its best efforts to:
(a) comply with the provisions of paragraph (c) (1) of Rule 144; and
(b) file with the Commission in a timely manner all reports and other
documents required to be filed by the Company pursuant to Section 13 or 15(d)
under the Exchange Act; and, if at any time it is not required to file such
reports but in the past had been required to or did file such reports, it will,
upon the request of any Investor, make available other information as required
by, and so long as necessary to permit sales of, its Registrable Securities
pursuant to Rule 144.
8. ASSIGNMENT
The rights to have the Company register Registrable Securities
pursuant to this Agreement shall be automatically assigned by the Investors to
any permitted transferee of all or any portion of such Registrable Securities
(or all or any portion of any Preferred Shares or Warrant of the Company which
is convertible into Registrable Securities) only if: (a) the Investor agrees in
writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time after such
assignment, (b) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (i) the name and address of such
transferee or assignee and (ii) the securities with respect to which such
registration rights are being transferred or assigned, (c) immediately following
such transfer or assignment, the securities so transferred or assigned to the
transferee or assignee constitute Restricted Securities, and (d) at or before
the time the Company received the written notice contemplated by clause (b) of
this sentence the transferee or assignee agrees in writing with the Company to
be bound by all of the provisions contained herein.
9. AMENDMENT AND WAIVER
Any provision of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and Investors who hold a majority-in-interest of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 9 shall be binding
upon each Investor and the Company.
10. CHANGES IN COMMON STOCK
If, and as often as, there are any changes in the Common Stock by way
of stock split, stock dividend, reverse split, combination or reclassification,
or through merger, consolidation, reorganization or recapitalization, or by any
other means, appropriate adjustment shall be made in the provisions hereof, as
may be required, so that the rights and privileges granted hereby shall continue
with respect to the Common Stock as so changed.
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<PAGE> 15
11. MISCELLANEOUS
(a) A person or entity shall be deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) If, after the date hereof and prior to the Commission declaring
the Registration Statement to be filed pursuant to Section 2(a) effective under
the Securities Act, the Company grants to any Person any registration rights
with respect to any Company securities which are more favorable to such other
Person than those provided in this Agreement, then the Company forthwith shall
grant (by means of an amendment to this Agreement or otherwise) identical
registration rights to all Investors hereunder.
(c) Except as may be otherwise provided herein, any notice or other
communication or delivery required or permitted hereunder shall be in writing
and shall be delivered personally or sent by certified mail, postage prepaid, or
by a nationally recognized overnight courier service, and shall be deemed given
when so delivered personally or by overnight courier service, or, if mailed,
three days after the date of deposit in the United States mails, as follows:
(i) if to the Company, to:
Innovative Gaming Corporation of America
4725 Aircenter Circle
Reno, Nevada 89502
Attention: Edward G. Stevenson, CEO
(775) 823-3000
(775) 823-3030 (Fax)
with a copy to:
Maslon Edelman Borman & Brand, LLP
3300 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attention: Douglas T. Holod, Esq.
(612) 672-8200
(612) 672-8397 (Fax)
(ii) if to the Initial Investor, to:
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<PAGE> 16
The Shaar Fund Ltd.,
c/o Levinson Capital Management
2 World Trade Center, Suite 1820
New York, NY 10048
Attention: Samuel Levinson
(212) 432-7711
(212) 432-7771 (Fax)
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555
(212) 504-5557 (Fax)
(iii) if to any other Investor, at such address as such Investor
shall have provided in writing to the Company.
The Company, the Initial Investor or any Investor may change the foregoing
address by notice given pursuant to this Section 11(c).
(d) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(e) This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection including
any objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions.
(f) The remedies provided in this Agreement are cumulative and not
exclusive of any remedies provided by law. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(g) The Company shall not enter into any agreement with respect to
its securities that is inconsistent with the rights granted to the holders of
Registrable Securities in
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<PAGE> 17
this Agreement or otherwise conflicts with the provisions hereof. The Company is
not currently a party to any agreement granting any registration rights with
respect to any of its securities to any person which conflicts with the
Company's obligations hereunder or gives any other party the right to include
any securities in any Registration Statement filed pursuant hereto, except for
the Assignment Agreement and the Class C Registration Rights Agreement and
except for such rights and conflicts as have been irrevocably waived. Without
limiting the generality of the foregoing, without the written consent of the
holders of a majority in interest of the Registrable Securities, the Company
shall not grant to any person the right to request it to register any of its
securities under the Securities Act unless the rights so granted are subject in
all respect to the prior rights of the holders of Registrable Securities set
forth herein, and are not otherwise in conflict or inconsistent with the
provisions of this Agreement. The restrictions on the Company's rights to grant
registration rights under this paragraph shall terminate on the date the
Registration Statement to be filed pursuant to Section 2(a) is declared
effective by the Commission. Notwithstanding the foregoing, the Company shall be
permitted to enter into and perform one or more registration rights agreements
with holders of the Company's Series D 6% Convertible Preferred Stock, par value
$0.01 per share, each containing provisions substantially similar to the
provisions of this Agreement.
(h) This Agreement, the Securities Purchase Agreement, the Escrow
Instructions, dated as of a date even herewith (the "ESCROW INSTRUCTIONS"),
between the Company, the Initial Investor and Cadwalader, Wickersham & Taft, the
Preferred Shares and the Warrants constitute the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Agreement, the Securities Purchase Agreement, the
Escrow Instructions, the Certificate of Designation and the Warrants supersede
all prior agreements and undertakings among the parties hereto with respect to
the subject matter hereof.
(i) Subject to the requirements of Section 8 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(j) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(k) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning thereof.
(l) The Company acknowledges that any failure by the Company to
perform its obligations under Section 3, or any delay in such performance could
result in direct damages to the Investors and the Company agrees that, in
addition to any other liability the Company may have by reason of any such
failure or delay, the Company shall be liable for all direct damages caused by
such failure or delay.
(m) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. A facsimile transmission of this signed Agreement shall be
legal and binding on all parties hereto.
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<PAGE> 18
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
INNOVATIVE GAMING CORPORATION OF AMERICA
By: s/ Edward G. Stevenson
----------------------------------------
Name: Edward G. Stevenson
Title: Chief Executive Officer
THE SHAAR FUND LTD.
By: s/ Samuel Levinson
----------------------------------------
Name: Samuel Levinson
Title: Managing Director
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<PAGE> 1
THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR
THE PROVISIONS OF THIS COMMON STOCK PURCHASE WARRANT.
Number of Shares of Common Stock: 50,000
Warrant No. D-1
COMMON STOCK PURCHASE WARRANT
To Purchase Common Stock of
Innovative Gaming Corporation of America
THIS IS TO CERTIFY THAT The Shaar Fund Ltd., or registered
assigns, is entitled, at any time from the Closing Date (as hereinafter defined)
to the Expiration Date (as hereinafter defined), to purchase from Innovative
Gaming Corporation of America, a Minnesota corporation (the "COMPANY"), 50,000
shares of Common Stock (as hereinafter defined and subject to adjustment as
provided herein), in whole or in part, including fractional parts, at a purchase
price equal to $2.75 per share, subject to adjustment as provided herein, all on
the terms and conditions and pursuant to the provisions hereinafter set forth.
1. DEFINITIONS
As used in this Common Stock Purchase Warrant (this
"WARRANT"), the following terms have the respective meanings set forth below:
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of
Common Stock issued by the Company after the Closing Date, other than Warrant
Stock.
"BOOK VALUE" shall mean, in respect of any share of Common
Stock on any date herein specified, the consolidated book value of the Company
as of the last day of any month immediately preceding such date, divided by the
number of Fully Diluted Outstanding shares of Common Stock as determined in
accordance with GAAP (assuming the payment of the exercise prices for such
shares) by Kafoury, Armstrong & Co. or any other firm of independent certified
public accountants of recognized national standing selected by the Company and
reasonably acceptable to the Holder.
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<PAGE> 2
"BUSINESS DAY" shall mean any day that is not a Saturday or
Sunday or a day on which banks are required or permitted to be closed in the
State of New York.
"CLOSING DATE" shall have the meaning set forth in the
Securities Purchase Agreement.
"COMMISSION" shall mean the Securities and Exchange Commission
or any other federal agency then administering the Securities Act and other
federal securities laws.
"COMMON STOCK" shall mean (except where the context otherwise
indicates) the Common Stock, par value $0.01 per share, of the Company as
constituted on the Closing Date, and any capital stock into which such Common
Stock may thereafter be changed, and shall also include (i) capital stock of the
Company of any other class (regardless of how denominated) issued to the holders
of shares of Common Stock upon any reclassification thereof which is also not
preferred as to dividends or assets over any other class of stock of the Company
and which is not subject to redemption and (ii) shares of common stock of any
successor or acquiring corporation received by or distributed to the holders of
Common Stock of the Company in the circumstances contemplated by Section 4.4.
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness,
shares of stock or other securities which are convertible into or exchangeable,
with or without payment of additional consideration in cash or property, for
shares of Common Stock, either immediately or upon the occurrence of a specified
date or a specified event.
"CURRENT WARRANT PRICE" shall mean, in respect of a share of
Common Stock at any date herein specified, the price at which a share of Common
Stock may be purchased pursuant to this Warrant on such date, as set forth in
the first paragraph hereof.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended, or any successor federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect from time to time.
"EXERCISE PERIOD" shall mean the period during which this
Warrant is exercisable pursuant to Section 2.1.
"EXPIRATION DATE" shall mean October 13, 2004.
"FULLY DILUTED OUTSTANDING" shall mean, when used with
reference to Common Stock, at any date as of which the number of shares thereof
is to be determined, all shares of Common Stock Outstanding at such date and all
shares of Common Stock issuable in respect of this Warrant, outstanding on such
date, and other options or warrants to purchase, or securities convertible into,
shares of Common Stock outstanding on such date which would be deemed
outstanding in accordance with GAAP for purposes of determining Book Value or
net income per share.
"GAAP" shall mean generally accepted accounting principles in
the United States of America as from time to time in effect.
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<PAGE> 3
"HOLDER" shall mean the Person in whose name the Warrant or
Warrant Stock set forth herein is registered on the books of the Company
maintained for such purpose.
"OTHER PROPERTY" shall have the meaning set forth in Section
4.4.
"OUTSTANDING" shall mean, when used with reference to Common
Stock, at any date as of which the number of shares thereof is to be determined,
all issued shares of Common Stock, except shares then owned or held by or for
the account of the Company or any subsidiary thereof, and shall include all
shares issuable in respect of outstanding scrip or any certificates representing
fractional interests in shares of Common Stock.
"PERSON" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, incorporated organization, association,
corporation, institution, public benefit corporation, entity or government
(whether federal, state, county, city, municipal or otherwise, including,
without limitation, any instrumentality, division, agency, body or department
thereof).
"REGISTRATION RIGHTS AGREEMENT" shall mean the Registration
Rights Agreement dated a date even herewith between the Company and The Shaar
Fund Ltd., as it may be amended from time to time.
"RESTRICTED COMMON STOCK" shall mean shares of Common Stock
which are, or which upon their issuance on their exercise of this Warrant would
be, evidenced by a certificate bearing the restrictive legend set forth in
Section 9.1(a).
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"SECURITIES PURCHASE AGREEMENT" shall mean the Securities
Purchase Agreement dated as of a date even herewith between the Company and The
Shaar Fund Ltd. as it may be amended from time to time.
"TRANSFER" shall mean any disposition of any Warrant or
Warrant Stock or of any interest in either thereof, which would constitute a
sale thereof within the meaning of the Securities Act.
"TRANSFER NOTICE" shall have the meaning set forth in Section
9.2.
"WARRANT PRICE" shall mean an amount equal to (i) the number
of shares of Common Stock being purchased upon exercise of this Warrant pursuant
to Section 2.1, multiplied by (ii) the Current Warrant Price as of the date of
such exercise.
"WARRANT STOCK" shall mean the shares of Common Stock
purchased by the holders of the Warrants upon the exercise thereof.
"WARRANTS" shall mean this Warrant and all warrants issued
upon transfer, division or combination of, or in substitution for, any thereof.
All Warrants shall at all times be
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<PAGE> 4
identical as to terms and conditions and date, except as to the number of shares
of Common Stock for which they may be exercised.
2. EXERCISE OF WARRANT
2.1 MANNER OF EXERCISE
From and after the Closing Date and until 5:00 p.m., New York
time, on the Expiration Date, Holder may exercise this Warrant, on any Business
Day, for all or any part of the number of shares of Common Stock purchasable
hereunder.
In order to exercise this Warrant, in whole or in part, Holder
shall deliver to the Company at its principal office at 4725 Aircenter Circle,
Reno, Nevada 89502, or at the office or agency designated by the Company
pursuant to Section 12, (i) a written notice of Holder's election to exercise
this Warrant, which notice shall specify the number of shares of Common Stock to
be purchased, (ii) payment of the Warrant Price in cash or wire transfer or
cashier's check drawn on a United States bank and (iii) this Warrant. Such
notice shall be substantially in the form of the subscription form appearing at
the end of this Warrant as Exhibit A, duly executed by Holder or its agent or
attorney. Upon receipt of the items referred to in clauses (i), (ii) and (iii)
above, the Company shall, as promptly as practicable, and in any event within
five Business Days thereafter, execute or cause to be executed and deliver or
cause to be delivered to Holder a certificate or certificates representing the
aggregate number of full shares of Common Stock issuable upon such exercise,
together with cash in lieu of any fraction of a share, as hereinafter provided.
The stock certificate or certificates so delivered shall be, to the extent
possible, in such denomination or denominations as Holder shall request in the
notice and shall be registered in the name of Holder or, subject to Section 9,
such other name as shall be designated in the notice. This Warrant shall be
deemed to have been exercised and such certificate or certificates shall be
deemed to have been issued, and Holder or any other Person so designated to be
named therein shall be deemed to have become a holder of record of such shares
for all purposes, as of the date the notice, together with the cash or check or
checks and this Warrant, is received by the Company as described above and all
taxes required to be paid by Holder, if any, pursuant to Section 2.2 prior to
the issuance of such shares have been paid. If this Warrant shall have been
exercised in part, the Company shall, at the time of delivery of the certificate
or certificates representing Warrant Stock, deliver to Holder a new Warrant
evidencing the rights of Holder to purchase the unpurchased shares of Common
Stock called for by this Warrant, which new Warrant shall in all other respects
be identical with this Warrant, or, at the request of Holder, appropriate
notation may be made on this Warrant and the same returned to Holder.
Notwithstanding any provision herein to the contrary, the Company shall not be
required to register shares in the name of any Person who acquired this Warrant
(or part hereof) or any Warrant Stock otherwise than in accordance with this
Warrant.
2.2 PAYMENT OF TAXES AND CHARGES
All shares of Common Stock issuable upon the exercise of this
Warrant pursuant to the terms hereof shall be validly issued, fully paid and
nonassessable, freely tradable and without any preemptive rights. The Company
shall pay all expenses in connection with, and all taxes and other governmental
charges that may be imposed with respect to, the issue or delivery
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<PAGE> 5
thereof, unless such tax or charge is imposed by law upon Holder, in which case
such taxes or charges shall be paid by Holder. The Company shall not be
required, however, to pay any tax or other charge imposed in connection with any
transfer involved in the issue of any certificate for shares of Common Stock
issuable upon exercise of this Warrant in any name other than that of Holder,
and in such case the Company shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid or it has been
established to the satisfaction of the Company that no such tax or other charge
is due.
2.3 FRACTIONAL SHARES
The Company shall not be required to issue a fractional share
of Common Stock upon exercise of any Warrant. As to any fraction of a share
which Holder would otherwise be entitled to purchase upon such exercise, the
Company shall pay a cash adjustment in respect of such final fraction in an
amount equal to the same fraction of the Current Warrant Price.
2.4 CONTINUED VALIDITY
A holder of shares of Common Stock issued upon the exercise of
this Warrant, in whole or in part (other than a holder who acquires such shares
after the same have been publicly sold pursuant to a Registration Statement
under the Securities Act or sold pursuant to Rule 144 thereunder), shall
continue to be entitled with respect to such shares to all rights to which it
would have been entitled as Holder under Sections 9, 10 and 14 of this Warrant.
The Company will, at the time of exercise of this Warrant, in whole or in part,
upon the request of Holder, acknowledge in writing, in form reasonably
satisfactory to Holder, its continuing obligation to afford Holder all such
rights; provided, however, that if Holder shall fail to make any such request,
such failure shall not affect the continuing obligation of the Company to afford
to Holder all such rights.
3. TRANSFER, DIVISION AND COMBINATION
3.1 TRANSFER
Subject to compliance with Section 9, transfer of this Warrant
and all rights hereunder, in whole or in part, shall be registered on the books
of the Company to be maintained for such purpose, upon surrender of this Warrant
at the principal office of the Company referred to in Section 2.1 or the office
or agency designated by the Company pursuant to Section 12, together with a
written assignment of this Warrant substantially in the form of Exhibit B hereto
duly executed by Holder or its agent or attorney and funds sufficient to pay any
transfer taxes payable upon the making of such transfer. Upon such surrender
and, if required, such payment, the Company shall, subject to Section 9, execute
and deliver a new Warrant or Warrants in the name of the assignee or assignees
and in the denomination specified in such instrument of assignment, and shall
issue to the assignor a new Warrant evidencing the portion of this Warrant not
so assigned, and this Warrant shall promptly be canceled. A Warrant, if properly
assigned in compliance with Section 9, may be exercised by a new Holder for the
purchase of shares of Common Stock without having a new warrant issued.
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3.2 DIVISION AND COMBINATION
Subject to Section 9, this Warrant may be divided or combined
with other Warrants upon presentation hereof at the aforesaid office or agency
of the Company, together with a written notice specifying the names and
denominations in which new Warrants are to be issued, signed by Holder or its
agent or attorney. Subject to compliance with Section 3.1 and with Section 9, as
to any transfer which may be involved in such division or combination, the
Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice.
3.3 EXPENSES
The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrants or Warrants under this
Section 3.
3.4 MAINTENANCE OF BOOKS
The Company agrees to maintain, at its aforesaid office or
agency, books for the registration and the registration of transfer of the
Warrants.
4. ADJUSTMENTS
The number of shares of Common Stock for which this Warrant is
exercisable, or the price at which such shares may be purchased upon exercise of
this Warrant, shall be subject to adjustment from time to time as set forth in
this Section 4. The Company shall give Holder notice of any event described
below which requires an adjustment pursuant to this Section 4 at the time of
such event.
4.1 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS
If at any time the Company shall:
(a) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Additional Shares of Common Stock;
(b) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock; or
(c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock;
then (i) the number of shares of Common Stock for which this Warrant is
exercisable immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record holder of the same
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the occurrence of such event would own or be entitled to
receive after the happening of such event, and (ii) the Current Warrant Price
shall be adjusted to equal (A) the Current Warrant Price multiplied by the
number of shares of
6
<PAGE> 7
Common Stock for which this Warrant is exercisable immediately prior to the
adjustment divided by (B) the number of shares for which this Warrant is
exercisable immediately after such adjustment.
4.2 CERTAIN OTHER DISTRIBUTIONS
If at any time the Company shall take a record of the holders
of its Common Stock for the purpose of entitling them to receive any dividend or
other distribution of:
(a) cash;
(b) any evidences of its indebtedness, any shares of its stock
or any other securities or property of any nature whatsoever (other than cash,
Convertible Securities or Additional Shares of Common Stock); or
(c) any warrants or other rights to subscribe for or purchase
any evidences of its indebtedness, any shares of its stock or any other
securities or property of any nature whatsoever (other than cash, Convertible
Securities or Additional Shares of Common Stock);
then Holder shall be entitled to receive such dividend or distribution as if
Holder had exercised the Warrant. A reclassification of the Common Stock (other
than a change in par value, or from par value to no par value or from no par
value to par value) into shares of Common Stock and shares of any other class of
stock shall be deemed a distribution by the Company to the holders of its Common
Stock of such shares of such other class of stock within the meaning of this
Section 4.2 and, if the outstanding shares of Common Stock shall be changed into
a larger or smaller number of shares of Common Stock as a part of such
reclassification, such change shall be deemed a subdivision or combination, as
the case may be, of the outstanding shares of Common Stock within the meaning of
Section 4.1.
4.3 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS
SECTION
The following provisions shall be applicable to the making of
adjustments of the number of shares of Common Stock for which this Warrant is
exercisable and the Current Warrant Price provided for in this Section 4:
(a) WHEN ADJUSTMENTS TO BE MADE. The adjustments required by
this Section 4 shall be made whenever and as often as any specified event
requiring an adjustment shall occur. For the purpose of any adjustment, any
specified event shall be deemed to have occurred at the close of business on the
date of its occurrence.
(b) FRACTIONAL INTERESTS. In computing adjustments under this
Section 4, fractional interests in Common Stock shall be taken into account to
the nearest 1/10th of a share.
(c) WHEN ADJUSTMENT NOT REQUIRED. If the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights and shall,
thereafter and before the distribution to stockholders thereof, legally abandon
its plan to pay or deliver such dividend, distribution, subscription or purchase
rights, then thereafter no adjustment shall be required by reason of the
7
<PAGE> 8
taking of such record and any such adjustment previously made in respect thereof
shall be rescinded and annulled.
(d) CHALLENGE TO GOOD FAITH DETERMINATION. Whenever the Board
of Directors of the Company shall be required to make a determination in good
faith of the fair value of any item under this Section 4, such determination may
be challenged in good faith by the Holder, and any dispute shall be resolved by
an investment banking firm of recognized national standing selected by the
Company and acceptable to Holder.
4.4 REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR
DISPOSITION OF ASSETS
In case the Company shall reorganize its capital, reclassify
its capital stock, consolidate or merge with or into another corporation (where
the Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Stock of the Company), or sell, transfer
or otherwise dispose of all or substantially all its property, assets or
business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("OTHER
PROPERTY"), are to be received by or distributed to the holders of Common Stock
of the Company, then Holder shall have the right thereafter to receive, upon
exercise of the Warrant, the number of shares of common stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and Other Property receivable upon or as a result of such reorganization,
reclassification, consolidation or disposition of assets by a holder of the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined by resolution of the Board of Directors of
the Company) in order to provide for adjustments of shares of Common Stock for
which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 4. For purposes of
this Section 4.4, "COMMON STOCK OF THE SUCCESSOR OR ACQUIRING CORPORATION" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 4.4 still similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.
8
<PAGE> 9
4.5 OTHER ACTION AFFECTING COMMON STOCK
In case at any time or from time to time the Company shall
take any action in respect of its Common Stock, other than any action described
in this Section 4, which would have a materially adverse effect upon the rights
of Holder, the number of shares of Common Stock and/or the purchase price
thereof shall be adjusted in such manner as may be equitable in the
circumstances, as determined in good faith by the Board of Directors of the
Company.
4.6 CERTAIN LIMITATIONS
Notwithstanding anything herein to the contrary, the Company
agrees not to enter into any transaction which, by reason of any adjustment
hereunder, would cause the Current Warrant Price to be less than the par value
per share of Common Stock.
5. NOTICES TO HOLDER
5.1 NOTICE OF ADJUSTMENTS
Whenever the number of shares of Common Stock for which this
Warrant is exercisable, or whenever the price at which a share of such Common
Stock may be purchased upon exercise of the Warrants, shall be adjusted pursuant
to Section 4, the Company shall forthwith prepare a certificate to be executed
by the chief financial officer of the Company setting forth, in reasonable
detail, the event requiring the adjustment and the method by which such
adjustment was calculated (including a description of the basis on which the
Board of Directors of the Company determined the fair value of any evidences of
indebtedness, shares of stock, other securities or property or warrants or other
subscription or purchase rights referred to in Section 4.2), specifying the
number of shares of Common Stock for which this Warrant is exercisable and (if
such adjustment was made pursuant to Section 4.4 or 4.5) describing the number
and kind of any other shares of stock or Other Property for which this Warrant
is exercisable, and any change in the purchase price or prices thereof, after
giving effect to such adjustment or change. The Company shall promptly cause a
signed copy of such certificate to be delivered to the Holder in accordance with
Section 14.2. The Company shall keep at its office or agency designated pursuant
to Section 12 copies of all such certificates and cause the same to be available
for inspection at said office during normal business hours by the Holder or any
prospective purchaser of a Warrant designated by Holder.
5.2 NOTICE OF CORPORATE ACTION
If at any time:
(a) the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend or other
distribution, or any right to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property, or to receive any other right; or
(b) there shall be any capital reorganization of the Company,
any reclassification or recapitalization of the capital stock of the Company or
any consolidation or merger of the
9
<PAGE> 10
Company with, or any sale, transfer or other disposition of all or substantially
all the property, assets or business of the Company to, another corporation; or
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 30 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, and (ii) in the case of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, at least 30 days' prior written notice of the date when the same shall take
place. Such notice in accordance with the foregoing clause also shall specify
(i) the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, the date on which the holders of Common Stock
shall be entitled to any such dividend, distribution or right, and the amount
and character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 14.2.
6. NO IMPAIRMENT
The Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate to protect the
rights of Holder against impairment. Without limiting the generality of the
foregoing, the Company will (a) not increase the par value of any shares of
Common Stock receivable upon the exercise of this Warrant above the amount
payable therefor upon such exercise immediately prior to such increase in par
value, (b) take all such action as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant, and (c) use its best efforts to
obtain all such authorizations, exemptions or consents from any public
regulatory body having jurisdiction thereof as may be necessary to enable the
Company to perform its obligations under this Warrant.
Upon the request of Holder, the Company will at any time
during the period this Warrant is outstanding acknowledge in writing, in form
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
10
<PAGE> 11
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK
From and after the Closing Date, the Company shall at all
times reserve and keep available for issue upon the exercise of Warrants such
number of its authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of all outstanding Warrants. All
shares of Common Stock which shall be so issuable, when issued upon exercise of
any Warrant and payment therefor in accordance with the terms of such Warrant,
shall be duly and validly issued and fully paid and nonassessable and not
subject to preemptive rights.
Before taking any action which would cause an adjustment
reducing the Current Warrant Price below the then par value, if any, of the
shares of Common Stock issuable upon exercise of the Warrants, the Company shall
take any corporate action which may be necessary in order that the Company may
validly and legally issue fully paid and nonassessable shares of such Common
Stock at such adjusted Current Warrant Price.
Before taking any action which would result in an adjustment
in the number of shares of Common Stock for which this Warrant is exercisable or
in the Current Warrant Price, the Company shall obtain all such authorizations
or exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by the
Company to the holders of its Common Stock with respect to which any provision
of Section 4 refers to the taking of record of such holders, the Company will in
each case take such a record and will take such record as of the close of
business on a Business Day. The Company will not at any time, except upon
dissolution, liquidation or winding up of the Company, close its stock transfer
books or Warrant transfer books so as to result in preventing or delaying the
exercise or transfer of any Warrant.
9. RESTRICTIONS ON TRANSFERABILITY
The Warrants and the Warrant Stock shall not be transferred,
hypothecated or assigned before satisfaction of the conditions specified in this
Section 9, which conditions are intended to ensure compliance with the
provisions of the Securities Act with respect to the Transfer of any Warrant or
any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by
the provisions of this Section 9.
9.1 RESTRICTIVE LEGEND
(a) Holder, by accepting this Warrant and any Warrant Stock
agrees that this Warrant and the Warrant Stock issuable upon exercise hereof may
not be assigned or otherwise transferred unless and until (i) the Company has
received an opinion of counsel for Holder that such securities may be sold
pursuant to an exemption from registration under the Securities Act or (ii) a
registration statement relating to such securities has been filed by the Company
and declared effective by the Commission.
11
<PAGE> 12
Each certificate for Warrant Stock issuable hereunder shall
bear a legend as follows until such securities have been sold pursuant to an
effective registration statement under the Securities Act:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND
SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS."
(b) Except as otherwise provided in this Section 9, the
Warrant shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES
AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT."
9.2 NOTICE OF PROPOSED TRANSFERS
Prior to any Transfer or attempted Transfer of any Warrants or
any shares of Restricted Common Stock, the Holder shall give ten days' prior
written notice (a "TRANSFER NOTICE") to the Company of Holder's intention to
effect such Transfer, describing the manner and circumstances of the proposed
Transfer, and obtain from counsel to Holder who shall be reasonably satisfactory
to the Company, an opinion that the proposed Transfer of such Warrants or such
Restricted Common Stock may be effected without registration under the
Securities Act. After receipt of the Transfer Notice and opinion, the Company
shall, within five days thereof, notify the Holder as to whether such opinion is
reasonably satisfactory and, if so, such holder shall thereupon be entitled to
Transfer such Warrants or such Restricted Common Stock, in accordance with the
terms of the Transfer Notice. Each certificate, if any, evidencing such shares
of Restricted Common Stock issued upon such Transfer shall bear the restrictive
legend set forth in Section 9.1(a), and the Warrant issued upon such Transfer
shall bear the restrictive legend set forth in Section 9.1(b), unless in the
opinion of such counsel such legend is not required in order to ensure
compliance with the Securities Act. Holder shall not be entitled to Transfer
such Warrants or such Restricted Common Stock until receipt of notice from the
Company under this Section 9.2(a) that such opinion is reasonably satisfactory.
12
<PAGE> 13
9.3 REQUIRED REGISTRATION
Pursuant to the terms and conditions set forth in Registration
Rights Agreement, the Company shall prepare and file with the Commission not
later than the 90th day after the Closing Date, a Registration Statement
relating to the offer and sale of the Common Stock issuable upon exercise of the
Warrants and shall use its best efforts to cause the Commission to declare such
Registration Statement effective under the Securities Act as promptly as
practicable but no later than 180 days after the Closing Date.
9.4 TERMINATION OF RESTRICTIONS
Notwithstanding the foregoing provisions of Section 9, the
restrictions imposed by this Section upon the transferability of the Warrants,
the Warrant Stock and the Restricted Common Stock (or Common Stock issuable upon
the exercise of the Warrants) and the legend requirements of Section 9.1 shall
terminate as to any particular Warrant or share of Warrant Stock or Restricted
Common Stock (or Common Stock issuable upon the exercise of the Warrants) (i)
when and so long as such security shall have been effectively registered under
the Securities Act and disposed of pursuant thereto or (ii) when the Company
shall have received an opinion of counsel reasonably satisfactory to it that
such shares may be transferred without registration thereof under the Securities
Act. Whenever the restrictions imposed by Section 9 shall terminate as to this
Warrant, as hereinabove provided, the Holder hereof shall be entitled to receive
from the Company upon written request of the Holder, at the expense of the
Company, a new Warrant bearing the following legend in place of the restrictive
legend set forth hereon:
"THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT
CONTAINED IN SECTION 9 HEREOF TERMINATED ON __________, _____,
AND ARE OF NO FURTHER FORCE AND EFFECT."
All Warrants issued upon registration of transfer, division or combination of,
or in substitution for, any Warrant or Warrants entitled to bear such legend
shall have a similar legend endorsed thereon. Whenever the restrictions imposed
by this Section shall terminate as to any share of Restricted Common Stock, as
hereinabove provided, the holder thereof shall be entitled to receive from the
Company, at the Company's expense, a new certificate representing such Common
Stock not bearing the restrictive legend set forth in Section 9.1(a).
9.5 LISTING ON SECURITIES EXCHANGE
If the Company shall list any shares of Common Stock on any
securities exchange or quotation system, it will, at its expense, list thereon,
maintain and, when necessary, increase such listing of, all shares of Common
Stock issued or, to the extent permissible under the applicable securities
exchange rules, issuable upon the exercise of this Warrant so long as any shares
of Common Stock shall be so listed during any such Exercise Period.
13
<PAGE> 14
10. SUPPLYING INFORMATION
The Company shall cooperate with Holder in supplying such
information as may be reasonably necessary for Holder to complete and file any
information reporting forms presently or hereafter required by the Commission as
a condition to the availability of an exemption from the Securities Act for the
sale of any Warrant or Restricted Common Stock.
11. LOSS OR MUTILATION
Upon receipt by the Company from Holder of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant and indemnity reasonably satisfactory to it (it being
understood that the written agreement of the Holder shall be sufficient
indemnity), and in case of mutilation upon surrender and cancellation hereof,
the Company will execute and deliver in lieu hereof a new Warrant of like tenor
to Holder; PROVIDED, in the case of mutilation no indemnity shall be required if
this Warrant in identifiable form is surrendered to the Company for
cancellation.
12. OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the Company
shall maintain an office or agency (which may be the principal executive offices
of the Company) where the Warrants may be presented for exercise, registration
of transfer, division or combination as provided in this Warrant.
13. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by
Holder to purchase shares of Common Stock, and no enumeration herein of the
rights or privileges of Holder hereof, shall give rise to any liability of
Holder for the purchase price of any Common Stock or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
14. MISCELLANEOUS
14.1 NONWAIVER AND EXPENSES
No course of dealing or any delay or failure to exercise any
right hereunder on the part of Holder shall operate as a waiver of such right or
otherwise prejudice Holder's rights, powers or remedies. If the Company fails to
make, when due, any payments provided for hereunder, or fails to comply with any
other provision of this Warrant, the Company shall pay to Holder such amounts as
shall be sufficient to cover any costs and expenses including, without
limitation, reasonable attorneys' fees, including those of appellate
proceedings, incurred by Holder in collecting any amounts due pursuant hereto or
in otherwise enforcing any of its rights, powers or remedies hereunder.
14
<PAGE> 15
14.2 NOTICE GENERALLY
Except as may be otherwise provided herein, any notice or
other communication or delivery required or permitted hereunder shall be in
writing and shall be delivered personally or sent by certified mail, postage
prepaid, or by a nationally recognized overnight courier service, and shall be
deemed given when so delivered personally or by overnight courier service, or,
if mailed, three (3) days after the date of deposit in the United States mails,
as follows:
(a) if to the Company, to:
Innovative Gaming Corporation of America
4725 Aircenter Circle
Reno, Nevada 89502
Attention: Edward G. Stevenson, CEO
(775) 823-3000
(775) 823-3030 (Fax)
with a copy to:
Maslon Edelman Borman & Brand, LLP
3300 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attention: Douglas T. Holod, Esq.
(612) 672-8200
(612) 672-8397 (Fax)
(b) if to the Holder, to:
The Shaar Fund Ltd.
c/o Levinson Capital Management
2 World Trade Center, Suite 1820
New York, NY 10048
Attention: Samuel Levinson
(212) 432-7711
(212) 432-7771 (Fax)
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555
(212) 504-5557 (Fax)
The Company or the Holder may change the foregoing address by notice given
pursuant to this Section 14.2.
15
<PAGE> 16
14.3 INDEMNIFICATION
The Company agrees to indemnify and hold harmless Holder from
and against any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of
any kind which may be imposed upon, incurred by or asserted against Holder in
any manner relating to or arising out of any failure by the Company to perform
or observe in any material respect any of its covenants, agreements,
undertakings or obligations set forth in this Warrant; PROVIDED, HOWEVER, that
the Company will not be liable hereunder to the extent that any liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, claims,
costs, attorneys' fees, expenses or disbursements are found in a final
nonappealable judgment by a court to have resulted from Holder's gross
negligence, bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
14.4 REMEDIES
Holder in addition to being entitled to exercise all rights
granted by law, including recovery of damages, will be entitled to specific
performance of its rights under Section 9 of this Warrant. The Company agrees
that monetary damages would not be adequate compensation for any loss incurred
by reason of a breach by it of the provisions of Section 9 of this Warrant and
hereby agrees to waive the defense in any action for specific performance that a
remedy at law would be adequate.
14.5 SUCCESSORS AND ASSIGNS
Subject to the provisions of Sections 3.1 and 9, this Warrant
and the rights evidenced hereby shall inure to the benefit of and be binding
upon the successors of the Company and the successors and assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant and, with respect to Section 9 hereof, holders
of Warrant Stock, and shall be enforceable by any such Holder or holder of
Warrant Stock.
14.6 AMENDMENT
This Warrant and all other Warrants may be modified or amended
or the provisions hereof waived with the written consent of the Company and
Holder.
14.7 SEVERABILITY
Wherever possible, each provision of this Warrant shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Warrant shall be prohibited by or invalid under
applicable law, such provision shall only be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Warrant.
14.8 HEADINGS
The headings used in this Warrant are for the convenience of
reference only and shall not, for any purpose, be deemed a part of this Warrant.
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<PAGE> 17
14.9 GOVERNING LAW
This Warrant shall be governed by the laws of the State of New
York, without regard to the provisions thereof relating to conflicts of law.
[SIGNATURE PAGE FOLLOWS.]
17
<PAGE> 18
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed and its corporate seal to be impressed hereon and attested by its
Secretary or an Assistant Secretary.
Dated: October [ ], 1999
INNOVATIVE GAMING CORPORATION OF
AMERICA
By:
--------------------------------------
Name:
Title:
Attest:
By:
--------------------------------
Name:
Title:
18
<PAGE> 19
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for the purchase of shares of Common Stock of Innovative
Gaming Corporation of America and herewith makes payment therefor, all at the
price and on the terms and conditions specified in this Warrant and requests
that certificates for the shares of Common Stock hereby purchased (and any
securities or other property issuable upon such exercise) be issued in the name
of and delivered to
- --------------------------------------------------------------------------------
whose address is
- --------------------------------------------------------------------------------
and, if such shares of Common Stock shall not include all of the shares of
Common Stock issuable as provided in this Warrant, that a new Warrant of like
tenor and date for the balance of the shares of Common Stock issuable hereunder
be delivered to the undersigned.
-----------------------------------
(Name of Registered Owner)
-----------------------------------
(Signature of Registered Owner)
-----------------------------------
(Street Address)
-----------------------------------
(City) (State) (Zip Code)
NOTICE: The signature on this
subscription must correspond with
the name as written upon the face
of the within Warrant in every
particular, without alteration or
enlargement or any change
whatsoever.
A-1
<PAGE> 20
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
shares of Common Stock set forth below:
No. of Shares of
Name and Address of Assignee Common Stock
---------------------------- ----------------
and does hereby irrevocably constitute and appoint
- --------------------------------------------------------------------------------
attorney-in-fact to register such transfer on the books of Innovative Gaming
Corporation of America maintained for the purpose, with full power of
substitution in the premises.
Dated:
-----------------------------------
-----------------------------------
(Print Name)
-----------------------------------
(Signature)
-----------------------------------
(Print Name of Witness)
-----------------------------------
(Witness's Signature)
NOTICE: The signature on this
assignment must correspond with the
name as written upon the face of
the within Warrant in every
particular, without alteration or
enlargement or any change
whatsoever.
B-1
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Registration Statement of our report dated February 26,
1999(except with respect to the matter discussed in Note 11, as to which the
date is July 16, 1999) included in Innovative Gaming Corporation of America's
Form 10-K (as amended by Form 10-K/A) for the year ended December 31, 1998 and
of our report dated July 16, 1999, for the years ended December 31, 1997 and
December 31, 1996, and to all references to our firm included in this
Registration Statement.
KAFOURY, ARMSTRONG & CO.
Reno, Nevada
January 10, 2000.
29
